Crypto Broker Logjam Possibly Cleared by Regulatory Guidance

(Bloomberg) -- U.S. regulators potentially cleared the way for dozens of firms to become registered cryptocurrency brokers by issuing guidance on how securities rules apply to some of the complicated compliance issues posed by digital tokens.

Crypto brokers that store customer holdings need to keep them separate from firm assets, maintain accurate books and records and, in certain cases, use a third-party custodian, according to a joint statement issued Monday by the Securities and Exchange Commission and Financial Industry Regulatory Authority. The regulators added that they’ve been holding a series of discussions with market participants on how decades-old custody rules might apply to the nascent technology of cryptocurrencies.

On Wall Street, firms like State Street Corp. provide custody services by holding securities for investment advisers. Banks and brokerages that offer such services must be qualified custodians under SEC rules.

Virtual-coin enthusiasts argue that solving the issue around custody will pave the way for more widespread investment in digital tokens, and firms have been pressing the SEC for months to issue guidance.

Bitcoin climbed after the SEC issued the guidance, increasing by as much as 11% to $12,290. It has more than tripled this year.

Issues around custody are particularly important for roughly two dozen companies that have been seeking to register with Finra as either brokers or so-called automated trading systems. Coinbase Inc. and Circle Internet Financial Ltd. are among U.S. titans of cryptocurrency trading that have been vying to become regulated brokers.

“Anything that provides clarity on what the SEC rules are relative to cryptocurrency is great for the industry,” Lou Kerner, a partner at CryptoOracle, said in an email statement. “Given the uncertainty, most crypto companies have been counseled to stop issuing or trading tokens in the U.S. That’s closing a massive market to the industry, depressing demand.”

Still, while the SEC’s Monday action might be momentous, it also laid out hurdles that some firms might face in getting the agency’s stamp of approval. For instance, the regulator said any broker that plans to custody clients’ digital securities must comply with customer protection rules. Such requirements could prove challenging when assets are stored electronically, and for an industry that’s well known for the frequent thefts of digital tokens.

--With assistance from Vildana Hajric.

To contact the reporters on this story: Matt Robinson in New York at mrobinson55@bloomberg.net;Ben Bain in Washington at bbain2@bloomberg.net

To contact the editors responsible for this story: Jesse Westbrook at jwestbrook1@bloomberg.net, Gregory Mott

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