A bipartisan group of nine lawmakers have asked the Securities and Exchange Commission and the Financial Industry Regulatory Authority (Finra) to clarify rules to allow broker-dealers to provide custodial services for digital assets.
The request comes five months after the Office of the Comptroller of the Currency gave national banks the green light to provide digital currency custody and as group’s such as Ric Edelman’s Digital Assets Council ramps up a certification program for financial advisors.
“Failing to approve broker-dealer applications involving the custody of digital securities leaves the industry without the infrastructure to operate in a regulated way,” the lawmakers said in letters to SEC Chairman Jay Clayton and Finra CEO Robert Cook.
“In the absence of guidance from the SEC, Finra has not outright denied any broker-dealer applications that involve the custody of digital securities, which would render the applications eligible for appeal. Rather, Finra has allowed the applications to languish—often for years—or asked the applicants to withdraw such applications,” lawmakers said.
The SEC and Finra acknowledged the issue in a joint statement in July 2019. At the time, the agencies said they wanted to address a number of issues before they approve digital currency firms as broker-dealers. One item on the their joint to-do- list, the agencies said, was deciding whether the digital currency in consideration falls under securities as per the Securities Investor Protection Act (SIPA).
However, as the lawmakers noted, the two agencies haven’t followed up since acknowledging the issue over a year ago. They believe that this lack of guidance “threatens to stymie the progress of the digital security industry in the United States.”
The bipartisan group consists of Reps. Tom Emmer (R-Minn.), Ro Khanna (D-Calif.), Darren Soto (D-Fla.), Dan Crenshaw (R-Texas), Ted Budd (R-N.C.), Ralph Norman (R-S.C.), Bill Foster (D-Ill.), David Schweikert (R-Ariz.) and Warren Davidson (R-Ohio).
Investors are driving interest in digital currencies as bitcoin hovers over $19,000, up from $3,183 a year ago. “In light of the [OCC’s] development, we encourage the SEC to develop requirements necessary to custody digital securities and enable Finra to approve broker-dealer applications that meet these requirements,” lawmakers added.
The legislators are proposing three steps they said the SEC and Finra should take to remedy “this unsustainable situation.” These include confirming that banks can provide digital securities custody; clarify with Finra the requirements broker-dealers to be able to custody digital assets for their customers as well as their own account; and instruct Finra to approve broker-dealer applications that meet requirements necessary to custody digital assets.
“Doing so would greatly increase the uniformity and efficiency of safekeeping mechanisms for all security types, resolving uncertainty and creating an environment for the digital securities industry to flourish,” the lawmakers said. The adoption of innovative technologies, including the issuance of securities via distributed ledgers, “would improve the functioning of securities markets by making them more efficient, accessible, and transparent, which should be welcomed and encouraged."