Digital Asset Custody Broker
To become a digital asset custody broker, it is necessary to meet several requirements. These include becoming members of a national securities association and becoming registered under Section 15A of the Exchange Act. Although the Commission’s Custody Statement is a welcome development, the registration process is likely to delay a broker-dealer’s ability to effectively custody digital assets.
Digital asset custody brokers must disclose the risks and conditions of holding digital assets, including any associated security network. They must also account for those risks in their customer agreements. If a broker-dealer does not do this, it is not permitted to provide custody of the digital assets. Further, brokers must limit their business to digital asset securities.
Digital asset custody brokers must provide robust services such as secure storage, buying and selling, and protection. This is made possible by cryptographic keys. Custody providers store both public and private cryptographic keys for secure transactions. Cryptographic keys are also a central part of digital asset custody. These keys are used to protect the assets and prevent them from being stolen.
The SEC issued a statement on February 26, 2021, setting out its position on digital assets. Because these assets are regarded as securities under federal securities law, custody must be regulated. The Commission is asking for comments on digital asset custody. The Commission has said that any special purpose broker-dealers should maintain custody of digital asset securities and must meet certain conditions.
The ADAM applauds these efforts toward creating a framework for digital asset securities custody. However, the regulatory environment of digital asset securities is changing rapidly and the federal securities laws may not be up to date to accommodate these innovations. Fortunately, the non-profit ADAM has created a Code of Conduct for its members.
How to Become a Digital Asset Custody Broker
Typically, a digital asset custody broker will facilitate transactions on the secondary market. A secondary market transaction occurs in which a broker-dealer introduces a buyer and a seller. The two parties settle the transaction bilaterally. The broker-dealer will then instruct the issuer to issue the digital asset security to the customer.
Regulation of the digital asset securities market is evolving rapidly, and the SEC has taken a cautious approach. In a December 2020 statement, the SEC stated that it supports innovation in this sector. The commission also stated that it will not pursue enforcement action against broker-dealers for five years, allowing time to develop the necessary processes.
A digital asset custodian provides an infrastructure and platform that address the security risks associated with digital assets. This includes a secure storage platform and robust authentication procedures. The services offered by a digital asset custodian also enable better transparency and control over digital assets. Furthermore, digital asset custodians manage private keys, which enables investors to better protect and manage their assets.
As the cryptocurrency market has risen, institutions have been investing more heavily in digital assets. They don’t need to access crypto funds often, but they also require greater flexibility than retail investors. In addition, institutional investors are likely to need higher-grade custody services. Typically, these services include accounting, KYC/AML integrations, prime brokerage services, and DeFi integration.