SEC new regulation implementation: Broker-dealers must exclusively control private keys when custodying encrypted asset securities

The Division of Trading and Markets under the U.S. Securities and Exchange Commission (SEC) recently issued a statement regarding the custody of “crypto asset securities” by broker-dealers. The statement aims to respond to market participants’ requests and provides temporary guidance on how to meet the “actual possession or control” requirement for customer assets under Rule 15c3-3 of the Securities Exchange Act. The core idea is that if a broker-dealer can exclusively control the relevant private keys, assess the underlying blockchain risks, and establish contingency plans, it can be considered compliant with “possession” of customer assets. This move is seen as a key step by the SEC in adapting traditional custody rules to blockchain technology, offering a preliminary regulatory pathway for traditional financial institutions to deepen their involvement in tokenized assets, while also imposing high technical and compliance standards on custodial service providers.

SEC Releases Custody Guidance: The Clash of Rules Between Traditional Finance and the Crypto World

This SEC statement is not made out of thin air but is a phased response to the long-standing calls for clearer regulation from the market. As the market for tokenized government bonds, equities, and other “crypto asset securities” begins to emerge and develop, traditional broker-dealers face the challenge of how to fulfill their traditional custody obligations on a decentralized ledger. The SEC explicitly defines “crypto asset securities” as tokenized versions of equity or debt securities, directly anchoring the scope of regulation and bringing such assets within the framework of existing securities laws.

The statement clearly states that its scope is limited to paragraph (b)(1) of Rule 15c3-3, which concerns the “actual possession or control” requirement, and does not involve other federal securities law obligations that broker-dealers must comply with. This limited, focused guidance demonstrates that regulators are attempting to “take small steps quickly” in this complex new field, prioritizing the resolution of the most urgent asset safety issues. For traditional brokerages hesitant to enter the crypto market, this is undoubtedly an important “operating manual.” Although labeled as “temporary,” it provides a critical basis for compliance in current business explorations.

What Is “Actual Possession”? SEC Defines New Standards for Crypto Asset Securities Custody

In the traditional financial world, broker-dealers demonstrate “actual possession or control” by holding customer securities in central depositories or segregated bank accounts. However, for crypto assets on the blockchain, this logic needs to be restructured. In this statement, the SEC assigns a new definition of “actual possession” that aligns with blockchain characteristics.

According to the statement, when certain conditions are met, broker-dealers can be considered to have “actual possession” of crypto asset securities that are fully paid and over-collateralized for their customers. The core pillar of this definition is exclusive control of the private keys. In short, the broker must be able to directly access the crypto asset securities and have the ability to transfer these assets on the relevant distributed ledger. This means that any third party, including the customer or related parties, must not access the private keys or transfer assets without the broker’s authorization. This requirement directly touches on the essence of crypto custody—who controls the private keys controls the assets. It rejects models where customers retain partial private key control, demanding complete and exclusive control by the custodian.

Key Custody Measures Under the SEC Compliance Framework

To ensure that “actual possession” is substantive rather than merely formal, the SEC further proposes five specific measures that must be implemented:

1. Access and Transfer Capability: The broker-dealer must directly hold and maintain the customer’s crypto asset securities, with the ability to access the blockchain and transfer assets.
2. Blockchain Technology Risk Assessment: Establish and implement reasonable written policies and procedures to regularly evaluate the security, operation, and governance mechanisms (such as protocol upgrade processes) of the distributed ledger technology recording asset ownership.
3. Risk Avoidance Obligations: If there is awareness of significant security or operational issues in the underlying technology, or if custody of the assets poses material risks to the firm’s business, the firm cannot be deemed to “possess” the assets.
4. Private Key Protection Standards: Policies, procedures, and controls must be established based on industry best practices to prevent private key theft, loss, or unauthorized and accidental use.
5. Contingency and Continuity Plans: Develop written plans to address emergencies that could affect asset possession (such as blockchain failures, 51% attacks, hard forks), including lawful asset freezing, destruction, or seizure orders, and ensure assets can be safely transferred to successors in bankruptcy or liquidation.

In-Depth Analysis of the New Regulations: Opportunities and Challenges for the Crypto Custody Industry

This statement is far more than a simple technical guideline; it conveys regulatory signals and potential impacts on industry structure that are profound. First, it officially recognizes the possibility of compliant custody through private key control, providing a legal foundation for professional crypto custody institutions and traditional brokerages seeking to engage in such activities. Notably, the fifth point regarding asset transfer arrangements in bankruptcy scenarios aims to address the core pain point exposed by incidents like FTX, where customer assets could be commingled.

However, behind the opportunity lie elevated compliance thresholds. The SEC’s requirements essentially establish a highly self-regulated and technologically driven custody standard. Broker-dealers must be not only asset custodians but also blockchain network analysts. They need to continuously monitor the health, governance, and potential vulnerabilities of each public or private chain they rely on, and make business decisions accordingly. This will impose significant operational costs, technical capabilities, and risk management pressures.

Furthermore, the requirement to “cooperate with asset freezing, destruction, or seizure orders” provides an interface for regulatory enforcement directly on-chain. This suggests that future qualified custodians compliant with SEC standards may need to embed complex compliance tools to meet law enforcement demands. For the inherently censorship-resistant crypto native sector, this is a noteworthy regulatory extension.

Market Impact and Future Outlook: Tokenized Securities Enter a Turning Point

SEC’s action will most directly accelerate the tokenization of traditional assets. As the custody infrastructure becomes clearer and compliant, more Wall Street institutions may confidently explore representing bonds, private equity, fund shares, and even real estate on-chain. This opens the door to a larger volume of compliant assets and incremental capital entering the crypto market.

Existing crypto exchanges and custody platforms, especially those involved in security token offerings, must reassess whether their models meet the SEC’s “actual possession” standards. Platforms unable to achieve full, exclusive control over customer assets or lacking robust risk management and contingency mechanisms may be marginalized in future competition. Major centralized exchanges (CEXs) might need to overhaul their custody architectures.

Looking ahead, this “temporary” guidance is just the beginning. The SEC has explicitly stated that it continues to consider additional issues related to crypto asset securities custody. More detailed rules are expected to follow, potentially covering capital requirements, insurance, audits, and more. Additionally, how this securities-based custody framework will coordinate with the Commodity Futures Trading Commission’s regulation of crypto assets with commodity attributes will be an important aspect of the evolving U.S. crypto regulatory landscape. In any case, this statement has established the first U.S. regulatory milestone for crypto asset securities custody, and its influence is expected to continue expanding.