Recent SEC Custody Guidance is Positive News for Bitcoin Investors

Bitcoin (“BTC”) is forecasted to be a profitable investment in 2021, with prices surging almost 300% in 2020 followed by another 19% gain on January 2, 2021. On December 23, 2020, the U.S. Securities and Exchange Commission (the “SEC”) issued a statement and request for comment regarding the custody of digital asset securities and cryptocurrencies, such as BTC, by broker-dealers in order, “to encourage innovation around the application of Securities Exchange Act Rule 15c3-3 to digital asset securities.” See, SEC link: statement.

The statement sets forth the SEC’s position that, for a period of five (5) years, a broker-dealer operating under the circumstances set forth in the statement will not be subject to an 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 digital asset securities for the purposes of paragraph (b)(1) of SEC Rule 15c3-3.

These circumstances, among other things, include that the broker-dealer limits its business to digital asset securities, establishes and implements policies and procedures reasonably designed to mitigate the risks associated with conducting a business in digital asset securities, and provides customers with certain disclosures regarding the risks of engaging in transactions involving digital asset securities.

The proposed framework laid out by the SEC will operate somewhat like a hybrid no-action letter/safe harbor/pilot program, pursuant to which “special purpose” brokers may follow certain, specific steps and custody digital asset securities during a five-year program period without the risk of facing an enforcement action from the SEC.

In sum, the SEC’s willingness to provide a safe haven from enforcement for five (5) years to broker-dealers supports the view that the SEC is more amenable to accepting the use of digital securities and cryptocurrencies in client portfolios, assuming these investments remain suitable. The SEC’s willingness to seek engagement from interested parties on this issue is also a positive development. In addition, recent industry adoption has created even more positive sentiment for BTC. For example, Anthony Scaramucci’s Skybridge Capital formally launched the Skybridge Bitcoin Fund with a target investment of $500 million in BTC with Fidelity Investment serving as its custodian. The SEC statement and request for comment are published on the SEC’s website and will become effective sixty (60) days after publication in the Federal Register.

If you have any questions about this Alert, or any other regulatory matters, do not hesitate to reach out to Daniel Viola (Partner – Head of the Regulatory Group) at 212.573.8038 or via email at dviola@sadis.com.