U.S. SEC seeks public comment on brokers' custody of digital assets

FILE PHOTO: The U.S. Securities and Exchange Commission logo adorns an office door at the SEC headquarters in Washington, June 24, 2011. REUTERS/Jonathan Ernst/File Photo

WASHINGTON (Reuters) - The U.S. Securities and Exchange Commission (SEC) on Wednesday asked for public comment on broker-dealer custody of digital assets and how the broker-dealers should be regulated when holding these products and recommending them to investors, the agency said in a statement.

The move, which the agency says will help inform future regulatory action in this market, comes after a July 2019 notice of guidance the SEC issued mandating firms comply with the customer protection rule, which requires broker-dealers to safeguard both the cash and securities of their customers. It does not currently address digital assets.

The SEC hopes to receive insight into the “evolving standards and best practices” regarding the custody of digital assets.

The investment advice industry had long been demanding clarity, particularly after the agency published here details about the expected scope and content for compliance with its new Regulation Best Interest, a 2020 rule that requires broker-dealers and investment advisers to disclose potential conflicts of interest before recommending financial products that benefit them.

On Wednesday, the agency staff also issued a statement in addition to its request for comment that offered relief from enforcement actions for up to five years to broker-dealer firms that have “obtained and maintained physical possession or control of customer fully paid and excess margin digital asset securities.”

Eligible broker-dealer firms must also limit their business to digital asset securities, isolate and mitigate risk in holding these transactions and disclose the risk to customers.

“The Commission is cognizant of both investor protection and potential capital-formation innovations that could result from digital asset securities,” the agency said.

Reporting by Katanga Johnson; Editing by Steve Orlofsky