FINRA Finally Approves a Special Purpose Broker for Custody of Crypto Asset Securities What Happens Next?

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More than two years after the United States Securities and Exchange Commission (SEC) introduced a new class of special purpose brokers authorized to hold crypto asset securities, the first special purpose broker (SPBD) appears to have been approved. Prometheum Ember Capital LLC, a registered broker, now also appears to be licensed to operate as an SPBD.

SPBD

The SPBD Regime was first introduced by the SEC in December 2020. Unlike other brokers and alternative trading systems, which could trade in securities of crypto assets after FINRA approval (l ‘Financial Industry Regulatory Authority), but could not hold such assets, SPBDs are permitted to both hold and transact in securities of crypto assets. However, the SPBD diet is also subject to a number of strict conditions. Among other things, an entity registering as an SPBD must:

have access to the securities of crypto assets it offers to hold and the ability to transfer them over the associated distributed ledger technology (DLT); not hold proprietary positions in traditional securities (i.e. non-cryptographic assets) other than for net equity and hedging purposes; not retain custody of any Crypto Asset title if Company becomes aware of any physical security or operational issues with the DLT and associated network used to access and transfer the Crypto Asset title; provide certain written information to its clients, including material risks of crypto asset securities; enter into a written agreement with each client that sets out the terms and conditions relating to transactions in securities of crypto assets; and have policies and procedures for: determining whether a crypto asset is a security offered and sold pursuant to an effective registration statement or an exemption from such registration; assess a crypto-asset security DLT and associated network; and demonstrate that the SPBD has sole control over the crypto asset securities it holds in custody, and to protect against the theft or loss of the private keys associated with such crypto asset securities.

And after?

Some of the requirements for SPBDs may have made being an SPBD an unattractive option for many brokers. For example, many brokers consider it too restrictive that SPBDs cannot hold or transact non-securities crypto assets (such as bitcoin), or crypto assets that are not registered or exempt. registration under the federal securities laws. These two restrictions have prevented SPBDs from holding or transacting the vast majority of crypto assets, including the most liquid assets, as well as those with large market capitalizations.

Now that an SPBD appears to have been approved, the likely next question is to ask what crypto assets are available for this entity to trade. It appears that there are only a handful of crypto asset securities registered or issued under an exemption available, and these securities have generally been very lightly traded. Will the SEC relax some or all of the terms of the SPBDs, including on the types of crypto assets it can trade? We must continue to monitor this space.

If you have any questions about the SPBD regime and the registration process, or about crypto assets more generally, please contact Amy Caiazza (202 973 8887), Neel Maitra (202 973 8827) or another member of Wilson Sonsinis fintech and financial services practice.

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