SIFMA has made some recommendations for the Securities and Exchange Commission (SEC) on its proposed framework to allow broker dealers to custody digital asset securities.
In a comment letter filed last week, SIFMA officials said they welcome the SEC’s efforts to resolve questions around custody of digital asset securities, but offered recommendations in several areas, including the definition of digital asset security, the problems with confining digital asset security activity to a special purpose broker-dealers and why it is not necessary from a risk perspective, proposed control frameworks and current industry best practices, clearance and settlement considerations, and investor protections.
“Providing a path forward for broker dealers to hold, or custody, these securities on behalf of clients will help resolve one of the key regulatory and operational challenges for the development of markets for these products. We would note, however, a unique or different risk profile does not necessarily mean risks are greater with respect to digital asset securities compared to traditional securities. Additionally, we believe only allowing broker-dealer entities to restrict their activities related to digital asset securities to a special purpose broker-dealer in order to provide custody of such securities will not best serve the interests of investors and is not necessary from a risk perspective,” Charles De Simone, vice president, technology and operations at SIFMA, said.
Among its recommendations, SIFMA believes that the SEC’s definition of digital asset security is overbroad, which means that the SEC’s concerns around the risks of custody may not be applicable for all digital asset securities.
Also, SIFMA said a principle-based approach to regulating activities related to digital asset securities would allow a broker-dealer the flexibility to develop best practices and comply with its existing regulatory obligations rather than focusing on the underlying technology. SIFMA added that any future rulemaking should not be based on a general distinction between digital asset securities and traditional securities but should be technology neutral.
Further, SIFMA does not believe that special purpose broker-dealers are necessary to custody, or hold on behalf of clients, digital asset securities securely as traditional broker-dealers can provide adequate protections for digital asset securities.
Finally, SIFMA recommends that investor disclosures around the custody of digital assets should distinguish between factors that may contribute to the risk of loss or theft of digital asset security and factors that may contribute to the operational performance of a particular digital asset network.
SIFMA is the leading trade association for broker-dealers, investment banks, and asset managers.