Not So Special After All: SEC Quietly Discards Special-Purpose Broker-Dealer Framework, Opens Digital Asset Custody to “Regular” Broker-Dealers

On May 15, 2025, the Division of Trading and Markets of the U.S. Securities and Exchange Commission (SEC) released a set of Frequently Asked Questions (FAQs) addressing the application of SEC Rule 15c3-3 (the Customer Protection Rule) to the custody of crypto assets that are securities by broker-dealers.^[1] The FAQs make clear that the SEC’s “Special Purpose Broker-Dealer” (SPBD) framework for crypto assets that are securities is optional, and on the same day, the SEC formally withdrew a July 2019 statement that had been widely viewed as a prohibition on broker-dealers offering custodial services for crypto assets that are not securities.^[2] These two actions (together, the Revised Guidance) clarify that the SEC is now ready and willing to apply longstanding investor protection standards to digital assets within the “regular” broker-dealer framework.

Background

The Revised Guidance is highly technical and lacks context, but its significance is apparent in light of the Customer Protection Rule.

The modern regulatory framework for securities custody was born in the aftermath of the so-called “paperwork blizzard” of the late 1960s.^[3] In that era, broker-dealers still settled securities transactions by delivering physical paper certificates. As trading volumes boomed, many of these paper certificates were misfiled or lost, trades went unsettled, and the resulting losses caused a wave of broker-dealers to fail, eroding confidence in the securities market as a whole.

Congress, the SEC, and the securities industry responded by building a new regulatory infrastructure for custody, clearance, settlement, and broker-dealer liquidation proceedings. The Depository Trust Company (DTC) was created to centralize custody of stock certificates and to allow transfers through book-entry instead of physical delivery of certificates. The National Securities Clearing Corporation (NSCC) was established to net and clear trades. The Securities Investor Protection Act of 1970 (SIPA) created the Securities Investor Protection Corporation (SIPC) to identify and promptly return customer cash and securities in the event of the failure of a broker-dealer.

The Customer Protection Rule complemented and operationalized this new infrastructure. The core of the Customer Protection Rule is the requirement for broker-dealers to maintain “physical possession or control” of fully paid and excess margin securities and to hold customer cash in segregated reserve accounts. As used here, “possession” refers to holding securities directly, and “control” requires holding the securities at a qualified “control location,” meaning a regulated third party such as DTC or a bank. By mandating either physical possession or “control” at a “control location,” the Customer Protection Rule is designed to facilitate the SIPC liquidation processand the prompt and orderly identification of customer assets if a broker-dealer fails, thus avoiding consumer harm and a loss of confidence in the securities industry.

This infrastructure has proven highly effective for traditional securities, but digital assets create tension with basic principles on which this infrastructure is built. As discussed above, the current securities trading, clearing, and settlement infrastructure assumes that securities and records of transfers are maintained by centralized, regulated intermediaries. Digital assets, by contrast, are natively issued on decentralized networks, have no physical certificated form, and generally cannot be “possessed” or “controlled” in the same way as a traditional security.

Further questions regarding crypto assets that are securities complicate the application of the Customer Protection Rule. First, it is unclear which crypto assets are securities. Second, it is unclear whether a broker-dealer can satisfy the requirement to maintain “physical possession” or “control” of crypto assets that are securities. Third, it is unclear whether a public blockchain network can qualify as a “control location.” Finally, it is unclear whether a crypto asset that is not a security may be protected under the Customer Protection Rule.

The SEC’s Initial Response

In July 2019, the Staff of the SEC’s Division of Trading and Markets and the Financial Industry Regulatory Authority (FINRA) issued a joint statement (the 2019 Joint Statement) cautioning that broker-dealers seeking to custody digital asset securities faced unique risks.^[4]While the 2019 Joint Statement identified numerous risks, it did not suggest or recommend mitigation strategies or solutions. In the context of federal financial regulation, this approach to supervisory guidance is understood as an implicit signal by regulators that an activity is disfavored or presumptively impermissible, even if there is no outright prohibition.

In December 2020, the SEC issued another statement (the 2020 SPBD Statement), which provided a limited enforcement safe harbor for broker-dealers seeking to custody digital asset securities under narrowly defined conditions as a “special purpose broker dealer” (SPBD).^[5] The 2020 SPBD Statement explained that broker-dealers operating under the SPBD framework could avoid enforcement under the Customer Protection Rule if they complied with strict asset segregation, disclosure, and operational requirements. However, the SPBD Statement was expressly limited to five years (and thus would expire in December 2025) and applied only to custody of digital asset securities. The 2020 SPBD statement did not provide clarification as to which digital assets are digital asset securities.

The 2019 Joint Statement and 2020 SPBD Statement together left broker-dealers with no clear path to legally offer custody services for digital asset non-securities and only a provisional pathway the SPBD framework to custody crypto assets that are securities.

The Revised Guidance

The SEC’s Revised Guidance reaffirms that the tensions between the text of the Customer Protection Rule (and complementary pieces, like SIPA) and the fundamental nature of digital assets still exist. The Revised Guidance reaffirms that SIPA protection remains unavailable for digital asset securities that are not registered under the Securities Act, and that SIPA protection (e.g. insurance) does not extend to both crypto assets that are securities and crypto assets that are not securities. However, the Revised Guidance provides solutions to several other issues on which the 2019 Joint Statement was silent or ambiguous. Three are particularly significant.

First, the Revised Guidance explains that a broker-dealer may establish “control” over a crypto asset that is a security even if the asset is not in certificated form. It explains that “control” can be demonstrated by placing the crypto asset at a qualified control location, which is the same approach taken for traditional securities. In this way, the Revised Guidance affirms that technical form of the security does not disqualify any security from custody under the Customer Protection Rule, provided that the custody arrangement satisfies the underlying purpose of ensuring prompt return of customer property.

Second, the Revised Guidance states that the SPBD framework is optional, not mandatory, for broker dealers who interact with crypto assets that are securities. In other words, while the 2020 SPBD Statement has not been rescinded, the FAQ suggests that “regular purpose” broker-dealers may custody crypto assets that are securities provided they comply with the Customer Protection Rule outside the safe harbor, so long as they meet the substantive custody and segregation requirements. This clarification allows all broker dealers to interact with crypto assets that are securities without obtaining a special qualification from the SEC and opens the door to operational innovation within the bounds of existing law.

Third, the Revised Guidance proposes a two-pronged solution to the issue of how broker-dealers should approach non-security crypto assets. First, the Revised Guidance encourages broker-dealers that conduct a non-security crypto asset business to maintain books and records equivalent to those required for securities transactions. Second, to enhance customer protections in the event of the broker-dealer’s failure (since the Customer Protection Rule and SIPA only apply to “securities”), the Revised Guidance suggests that broker-dealers may structure custody arrangements under commercial law principles and designate the asset as a “financial asset” held in a “securities account” under Article 8 of the Uniform Commercial Code (UCC).

Conclusion

The SEC’s Revised Guidance represents an important step in reconciling the legacy regulatory framework with digital assets without amending the regulation. The Revised Guidance is better understood as a return to the existing market structure and principles applicable to securities generally: customer property held by a broker-dealer, now including various crypto assets, must be segregated, identifiable, legally protected, and readily returnable in the event of a broker-dealer failure.

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[1] See “Frequently Asked Questions Relating to Crypto Asset Activities and Distributed Ledger Technology” (May 15, 2025), available at https://www.sec.gov/rules-regulations/staff-guidance/trading-markets-frequently-asked-questions/frequently-asked-questions-relating-crypto-asset-activities-distributed-ledger-technology

[2] See “Withdrawal of Joint Staff Statement on Broker-Dealer Custody of Digital Asset Securities” (May 15, 2025), available at https://www.sec.gov/newsroom/speeches-statements/withdrawal-joint-staff-statement-broker-dealer-custody-digital-asset-securities

[3] https://www.nytimes.com/1976/03/01/archives/wall-sthandling-big-volume-deftly-unlike-paperwork-blizzard-of.html

[4] See  “Joint Staff Statement on Broker-Dealer Custody of Crypto asset Securities” (Published July 8, 2019; Withdrawn May 15, 2025), available at https://www.sec.gov/newsroom/speeches-statements/joint-staff-statement-broker-dealer-custody-digital-asset-securities.

[5] See “Custody of Crypto asset Securities by Special Purpose Broker-Dealers,” Exchange Act Release No. 90788 (Dec. 23, 2020), 86 Fed. Reg. 11,627 (Feb. 26, 2021).