The SEC’s Updated Guidance on Crypto Asset Custody: An Analytical Overview
The U.S. Securities and Exchange Commission (SEC) has recently undertaken a significant revision of its Frequently Asked Questions (FAQs) regarding crypto asset activities. This update elucidates the custody and capital requirements applicable to broker-dealers such as Morgan Stanley and Goldman Sachs in relation to crypto asset securities, while also addressing the implications of this framework for Bitcoin and Ethereum Exchange-Traded Funds (ETFs). The updated guidance is cataloged under the Trading and Markets FAQ index, specifically titled “Frequently Asked Questions Relating to Crypto Asset Activities and Distributed Ledger Technology (May 15, 2025) – UPDATED December 17, 2025.” This critical revision serves as a contemporary reference for financial institutions navigating the evolving landscape of tokenized securities distribution and exchange-traded product (ETP) market-making.
The Impact of the SEC’s Custody Guidance on Broker-Dealer Control of Crypto Assets
In the revised FAQ documentation, SEC staff reaffirm that Rule 15c3-3(b), which pertains to “possession or control,” is not applicable to non-security cryptocurrencies held by broker-dealers. Consequently, non-security cryptocurrencies remain outside the jurisdiction of the Customer Protection Rule, which governs securities custody.
For crypto asset securities specifically, the SEC’s staff delineates that broker-dealers may establish “control” in accordance with Rule 15c3-3(c) despite the absence of physical certification through the utilization of recognized control locations. This development significantly mitigates reliance on the special-purpose broker-dealer (SPBD) safe harbor as the predominant mechanism for demonstrating control over these assets. Furthermore, the guidance indicates a willingness to accept that broker-dealers facilitating in-kind creations and redemptions can classify proprietary positions in Bitcoin or Ether as “readily marketable” for net capital calculations, applying a 20% commodity haircut under Rule 15c3-1 Appendix B during deduction computations.
Redefining “Control” in Crypto Asset Custody: Implications of SEC Withdrawal
The formal withdrawal of the joint staff statement from 2019 issued by the SEC and FINRA regarding broker-dealer custody of digital asset securities has recalibrated the conceptual landscape surrounding custody practices. This withdrawal confines broker-dealer custody considerations primarily to the updated FAQ framework, emphasizing existing control-location criteria for crypto asset securities.
Of particular operational significance is the practical execution required to fulfill the “control” mandate established in Rule 15c3-3(c), especially when dealing with blockchain-recorded securities. Notably, while FAQ guidelines do not explicitly mandate that broker-dealers retain private keys, compliance with Rule 15c3-3(c) necessitates safeguarding customer securities and directing their movement at an authorized control location. In practice, this often translates to identifying who possesses signing authority or can compel signing through a defined custody structure.
Examples of such structures include:
- Broker-dealer-held key material within a Hardware Security Module (HSM)
- Bank control locations where documented directive rights are established
- Multisignature arrangements designed to meet control-location expectations
Legal analyses have highlighted that this new approach expands pathways for conventional broker-dealers to substantiate control without defaulting to SPBD status, thereby increasing emphasis on contractual language, key governance frameworks, and audit trails that provide evidence of ongoing control.
Economic Considerations for ETPs and Market-Making Strategies
The revised stance on treating proprietary Bitcoin and Ether positions as “readily marketable” directly influences intraday inventory economics for authorized participants and market makers involved in facilitating in-kind baskets. A capital-efficiency model illustrates this dynamic: should an affiliated broker-dealer maintain an average intraday inventory valued at $50 million in BTC or ETH for facilitating creations and redemptions, a 20% commodity haircut would result in a net capital deduction approximating $10 million related to that inventory.
This financial calculus is illustrative rather than exhaustive but underscores why certain trading desks favor cash workflows; staff treatment may render in-kind operations more feasible for firms functioning on narrow profit margins.
Shifting Dynamics in Bank Partnerships: Procedural Simplification
The Federal Reserve’s recent withdrawal of supervisory letters dated April 24, 2025, which previously imposed advance-notice requirements for several crypto-asset activities, signifies a shift toward more routine supervisory engagements with banks. For broker-dealers reliant on bank sub-custody as a means of establishing control locations, this alteration is particularly consequential as it may expedite dialogues between broker-dealers and banking institutions regarding compliance.
Nevertheless, broker-dealers must still substantiate compliance with Rule 15c3-3(c) and maintain records that can withstand scrutiny from regulatory examination teams. In the ensuing 12–18 months, it is anticipated that market participants will congregate around custody structures that consistently provide verifiable evidence of control while simultaneously mitigating cyber and operational risks.
Decision Matrix: Evaluating Control Structures
| Scenario (12–18 months) | Control Location (Signing or Directive Authority) | Primary Operational Benefit | Main Execution Risk |
|---|---|---|---|
| Broker-dealer self-custody | Broker-dealer-controlled keys (HSM or multisig) | Direct evidence trail for 15c3-3(c) control | Cybersecurity controls, insurance limits, auditability at scale |
| Bank sub-custody with broker-dealer directive rights | Bank as control location; broker-dealer directs movements | Familiar custody perimeter for existing incumbents | Contractual terms must demonstrate control during incidents |
| Crypto custodian technology with bank or trust wrapper | Specialist tooling; control framed via agreements | Speed of integration for tokenized security workflows | Control-location qualification and consistency in supervision |
| Smart-contract escrow with transfer-agent co-signing | Multisig arrangement between broker-dealer and transfer agent | Programmable controls facilitating corporate actions | Challenges in how examination teams assess “control” over time |
The Path Forward: Regulatory Signals and Compliance Imperatives
The December 17 update maintains clarity regarding retail-facing firms by affirming that non-security cryptocurrencies held at broker-dealers are exempt from Rule 15c3-3(b). However, firms remain obligated to provide explicit disclosures outlining applicable protections.
Commissioner Hester Peirce has characterized these staff FAQs as incremental advancements while underscoring their potential to reduce friction for market participants attempting to reconcile on-chain activities with existing regulatory frameworks. For compliance teams within these institutions, immediate indicators will be tangible: monitoring whether the SEC FAQ index undergoes further modifications will serve as a crucial barometer.
A parallel indicator will be whether FINRA’s interpretations evolve towards establishing standardized checklists for examiners assessing on-chain evidence of control alongside books and records management practices.
