Division of Trading and Markets: Frequently Asked Questions Relating to Crypto Asset Activities and Distributed Ledger Technology

The staff of the Division of Trading and Markets (the “Staff”) of the Securities and Exchange Commission (“Commission”) has prepared the following responses to frequently asked questions relating to crypto asset[1] activities and distributed ledger technology. These responses represent the views of the staff of the Division of Trading and Markets. They are not a rule, regulation, or statement of the Commission. The Commission has neither approved nor disapproved their content. These responses, like all staff statements, have no legal force or effect: they do not alter or amend applicable law, and they create no new or additional obligations for any person.

Broker-Dealer Financial Responsibility 

Q1: Does paragraph (b) of Exchange Act Rule 15c3-3 apply to crypto assets that are not securities?

A1: No. Paragraph (b) of Rule 15c3-3 applies only to securities carried by a broker-dealer for the account of customers or for a proprietary securities account of another broker or dealer, known as a “PAB account” (as further defined in paragraph (a)(16) of Rule 15c3-3).

Q2: Could a broker-dealer establish control of a crypto asset that is a security via paragraph (c) of Rule 15c3-3?

A2: In the Staff’s view, yes. The Staff notes that although certain control locations in paragraph (c) of Rule 15c3-3 reference a security being in certificated form to establish control under that provision, the Staff will not object if such crypto asset securities are not in certificated form when held at an otherwise qualifying control location under paragraph (c) of Rule 15c3-3.

Q3: Is compliance with the Commission’s 2020 statement – “Custody of Digital Asset Securities by Special Purpose Broker-Dealers” – (the “SPBD Statement”)[2] mandatory for broker-dealers seeking to custody customer crypto assets that are securities?

A3: No. Rule 15c3-3(b) requires a broker-dealer to obtain and “maintain the physical possession or control” of all fully paid securities and excess margin securities carried by the broker-dealer for the account of customers. The SPBD Statement set forth a temporary Commission position or “safe harbor” that a broker-dealer, under certain specified circumstances, would not be subject to a Commission enforcement action on the basis that the broker-dealer deems itself to have obtained and maintained physical possession or control of customer fully paid and excess margin securities. However, the SPBD Statement did not amend Rule 15c3-3 or any other rule. Therefore, in the Staff’s view, a broker-dealer carrying crypto asset securities for a customer or PAB account may establish control under paragraph (c) of Rule 15c3-3, as discussed in question 2 above. 

Q4: Do broker-dealer custody and capital requirements prohibit a broker-dealer from facilitating in-kind creations and redemptions in connection with a spot crypto exchange-traded product (ETP)?

A4: No. However, broker-dealers taking proprietary positions in the assets underlying an ETP would need to account for those assets as part of their net capital calculations. The Staff will not object if a broker-dealer treats a proprietary position in bitcoin or ether as being readily marketable for purposes of determining whether the 20% haircut applicable to commodities under Appendix B of Rule 15c3-1 applies.

Q5: Are crypto assets that are investment contracts treated as securities under the Securities Investor Protection Act of 1970 (“SIPA”) and protected by Securities Investor Protection Corporation (“SIPC”) if they are not the subject of a registration statement filed under the Securities Act of 1933? [3] 

A5: No, SIPA defines “security,” in pertinent part, as “any investment contract or certificate of interest or participation in any profit-sharing agreement . . . if such investment contract or interest is the subject of a registration statement with the Commission pursuant to the provisions of the Securities Act of 1933 . . ..” Therefore, investment contracts that are not the subject of a registration statement filed under the Securities Act of 1933 are not protected under SIPA.

Q6: Does SIPC protect customer claims for non-security crypto assets when held for the customer by a SIPC member broker-dealer?

A6: No. In general, SIPC protection extends to customer claims for “securities,” as defined under SIPA, that are entrusted to a SIPC member broker-dealer.

Q7: In light of the fact that SIPC does not protect custodial claims for crypto assets that are not securities, are there ways to help ensure that customers’ non-security crypto assets at a broker-dealer will be returned to customers if the broker-dealer becomes insolvent? 

A7: Possibly. For example, a broker-dealer may agree with its customers that non-security crypto assets custodied by the broker-dealer for the customers for purposes of Article 8 of the Uniform Commercial Code be treated as “financial assets” and carried in a “securities account,” as those terms are defined in Article 8. Such treatment could help ensure that customer non-security crypto assets do not become part of the broker-dealer’s estate if the broker-dealer is placed in a liquidation under SIPA or the Bankruptcy Code. Non-security crypto assets are not protected by SIPA and may not be protected by any other specific insolvency regime, and customers may be exposed to loss of such assets in the event of an insolvency.

Q8: If a broker-dealer conducts a non-security crypto asset business, are there ways to help ensure adequate records are made and preserved?

A8: Yes. The Staff views prudent recordkeeping practices as being essential for investor protection in the operation of a broker-dealer, to perform an audit or examination of the broker-dealer, and for a trustee appointed under SIPA or otherwise to liquidate the broker-dealer. In the Staff’s view, a broker-dealer that conducts a non-security crypto asset business could make and keep the same records for its non-security crypto activities as it does for its securities activities. 

Transfer Agents

Q9: Is a person acting as a transfer agent for an issuer of a crypto asset that is a security required to register with the SEC as a transfer agent?

A9: Maybe. The term “transfer agent” is defined in Section 3(a)(25) of the Exchange Act as any person who engages on behalf of an issuer of securities or on behalf of itself as an issuer of securities in any of five enumerated activities: (A) countersigning securities upon issuance; (B) monitoring for unauthorized issuances; (C) registering the transfer of securities; (D) exchanging or converting securities; or (E) transferring record ownership of securities by bookkeeping entry without physical issuance of securities certificates (collectively, “3(a)(25) Activities”). Under Section 17A(c)(1) of the Exchange Act, a transfer agent that performs any of these 3(a)(25) Activities with respect to a security that is registered under Section 12 of the Exchange Act or which would be required to be registered except for the exemption from registration provided by Section 12(g)(2)(B) or Section 12(g)(2)(G) of the Exchange Act (i.e., certain securities issued by a registered investment company or an insurance company) (collectively, “Section 12 Securities”) must register as a transfer agent with the SEC (or with one of the Federal bank regulators if the transfer agent is a bank). Importantly, multiple entities may perform one or more 3(a)(25) Activities on behalf of the same issuer. For example, the registered transfer agent hired by an issuer might register the transfer of the issuer’s securities but hire one or more other transfer agents to monitor for unauthorized issuances or perform other processing and recordkeeping functions. Exchange Act Rule 17Ad-9(h)-(k) defines some of the relationships among transfer agents providing services for the same issuer.

To determine whether registration as a transfer agent is required, persons providing services for crypto assets that are securities thus should (i) determine whether those securities are Section 12 Securities and (ii) analyze the services, functions, or activities they are performing with respect to those securities and determine whether any of those services, functions, or activities quality as 3(a)(25) Activities. If an entity is not providing services for any Section 12 Securities, or is only providing services for Section 12 Securities that do not qualify as 3(a)(25) Activities, it would not be required to register as a transfer agent.

Q10: Could a registered transfer agent utilize distributed ledger technology as its official Master Securityholder File, as that term is defined under Exchange Act Rule 17Ad-9(b), or a component thereof? 

A10: In the Staff’s view, yes, provided that the transfer agent complies with all other applicable requirements under the federal securities laws, including the recordkeeping, reporting, examination, and other requirements of Sections 17(a)(1) and 17(b) of the Exchange Act; the turnaround and other requirements of Exchange Act Rule 17Ad-2; the recordkeeping and other requirements of Rule 17Ad-6; the record retention and other requirements of Rule 17Ad-7; the prompt posting and other requirements of Rule 17Ad-10; the aged record difference, buy-in, and other requirements of Rule 17Ad-11; the safeguarding and other requirements of Rule 17Ad-12; and the accounting control, report, and other requirements of Rule 17Ad-13. Provided these requirements are met, in the Staff’s view, the transfer agent would not need to maintain a duplicate or “digital twin” of its master securityholder file exclusively off-chain. 

Staff understands that some transfer agents’ master securityholder files comprise multiple files or systems. In the context of distributed ledger technology, this may mean that transaction information, such as wallet address, asset balance, ownership percentage, number of shares or units, date of purchase, and transaction ID, is maintained on a blockchain while personal information, like the investor’s name, investor ID, address and other contact information, Tax ID or social security number, and other identifying or non-public information, is kept off-chain within the transfer agent’s proprietary systems. In the Staff’s view, provided the transfer agent ensures that its records are at all times secure, accurate, up-to-date, produceable to the Commission and its staff in an easily-readable format, and maintained for the required time periods under the rules, the specific technology, systems or files that comprise the records would generally be within the transfer agent’s discretion. 

Staff welcomes questions about the application of the Commission’s transfer agent rules to crypto asset activities and distributed ledger technology. We also welcome requests for other assistance (including requests for interpretive or no-action letters) relating to these issues and questions.