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SEC offers limited safe harbor to broker/dealers working with digital assets

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SEC offers limited safe harbor to broker/dealers working with digital assets

The top U.S. securities regulator is allowing broker/dealers to offer digital asset services without threat of enforcement action for five years, provided that the companies follow its guidelines for protecting customers.

The Securities and Exchange Commission on Dec. 23 issued a statement and request for comment to encourage improvement in the infrastructure underlying the digital asset custody industry. The regulator created a five-year window during which a broker/dealer that deems itself to have secured control of customer fully paid and excess margin digital asset securities would not face enforcement action. Companies would also have to limit business to digital asset securities, implement procedures to mitigate the risks inherent in cryptocurrency assets and similar digital securities, and give clients disclosures addressing the risks of holding or trading digital asset securities.

"The five-year period in which the statement is in effect is designed to provide market participants with an opportunity to develop practices and processes that will enhance their ability to demonstrate possession or control over digital asset securities," the SEC wrote in its statement. "It also will provide the commission with experience in overseeing broker/dealer custody of digital asset securities to inform further action in this area."

The SEC's position focuses on establishing whether a broker/dealer has adequate control of the digital assets in question since the assets are not held or recorded like traditional securities such as stocks. For example, a broker/dealer would need to show it can protect a customer's private key, the unique code that allows digital assets to be accessed or used. Broker/dealers would also need to show they can assess the distributed ledger technology that underlies a digital asset.

The regulator is inviting industry participants to send comments on the standards and best practices now in use and how they could change, which will inform its future regulation of the digital asset space.