SEC's Updated Crypto Rules: How Major Broker-Dealers Gain New Control Over Digital Assets

SEC's Updated Crypto Rules: How Major Broker-Dealers Gain New Control Over Digital Assets

The financial landscape for digital assets is undergoing a significant shift, spearheaded by recent clarifications from the U.S. Securities and Exchange Commission (SEC). An update to their crypto asset FAQs, posted on December 17, 2025, has redefined how prominent broker-dealers, including giants like Morgan Stanley and Goldman Sachs, can meet custody and capital requirements for crypto asset securities. This revised guidance addresses critical questions, particularly regarding Bitcoin and Ethereum Exchange Traded Product (ETP) activities, and crucially, outlines how these firms can legally establish “control” over certain digital assets, even those linked to private keys.

This development is more than just a regulatory tweak; it serves as a pivotal reference point as custody design becomes a fundamental element for the distribution of tokenized securities and the seamless functioning of the ETP market. For many, it raises questions about the perceived safety net traditionally associated with digital asset ownership and the role of major financial institutions in safeguarding private keys.

Reshaping Broker-Dealer Control: Understanding the SEC's Guidance

At the heart of the SEC’s updated guidance is a critical distinction in how different types of crypto assets are treated. The staff reiterates that Rule 15c3-3(b), which governs "possession or control" for customer securities, does not extend to non-security crypto assets held by broker-dealers. This means that assets like certain unclassified cryptocurrencies remain outside the protective mechanics of the Customer Protection Rule, which typically applies to traditional securities custody.

However, for crypto asset securities, the guidance carves out a specific path. The SEC staff now states that a broker-dealer can establish "control" under Rule 15c3-3(c) through the use of qualifying control locations, even if the instrument itself isn't certificated in a traditional sense. This approach significantly reduces the reliance on the special-purpose broker-dealer (SPBD) safe harbor, which was previously considered the primary route for demonstrating control over these digital securities. Essentially, regular broker-dealers now have a more direct pathway to engaging with crypto asset securities under existing regulatory frameworks.

Furthermore, the SEC staff has indicated that it would not object to broker-dealers treating proprietary positions in Bitcoin or Ether as "readily marketable" for net capital calculations, particularly when facilitating in-kind creations and redemptions for ETPs. This allows for the application of a 20% commodity haircut under Rule 15c3-1 Appendix B when computing capital deductions, a move that directly impacts the operational economics for firms involved in supporting these popular digital asset products.

The Withdrawal of Previous Guidance and Its Implications for "Control"

In a significant move to consolidate its messaging, the 2019 SEC and FINRA joint staff statement on broker-dealer custody of digital asset securities has been formally withdrawn. This withdrawal, accompanied by a parallel notice from FINRA, streamlines the regulatory landscape, narrowing the broker-dealer custody "north star" exclusively to the new FAQ framework and its emphasis on existing control-location concepts for crypto asset securities.

The most pressing operational question arising from this shift is what constitutes "control" in practice when securities are recorded on a blockchain. While the FAQ doesn't explicitly mandate that a broker-dealer must directly hold private keys, Rule 15c3-3(c) control is fundamentally tied to safeguarding and directing the movement of customer securities at a recognized control location. For instruments residing on a blockchain, this often translates to who holds the authority to sign transactions or compel signing through their custody infrastructure.

"The updated SEC guidance expands the path for regular broker-dealers to evidence control without leaning on special-purpose broker-dealer status, shifting focus to robust contract language, key governance, and an ironclad audit trail."

Examples of how this "control" can be demonstrated include:

• Broker-dealer held key material secured within a Hardware Security Module (HSM).
• A bank serving as a control location where the broker-dealer possesses documented directive rights over the assets.
• Sophisticated multisignature arrangements where the broker-dealer’s signatory authority and operational procedures are meticulously designed to meet control-location expectations.

Law firms like Sullivan & Cromwell and Sidley Austin have highlighted that this approach empowers established broker-dealers to demonstrate control more readily, intensifying the focus on the robustness of contractual agreements, the intricate governance surrounding private keys, and the clear audit trails that prove consistent control over time.

Capital Efficiency for ETPs: The "Readily Marketable" Stance

The SEC’s position on treating proprietary Bitcoin and Ether positions as "readily marketable" directly influences the intraday inventory economics for authorized participants and market makers that facilitate in-kind creations and redemptions for ETPs. This is a critical factor for firms operating on razor-thin spreads in the highly competitive digital asset market.

Consider a hypothetical scenario: If an affiliated broker-dealer maintains an average intraday inventory of $50 million in Bitcoin or Ether to support these creation and redemption activities, applying the 20% commodity haircut would result in an estimated net capital deduction of around $10 million linked to that inventory. While this isn't a comprehensive net capital model, it vividly illustrates why some trading desks traditionally favor cash workflows. The SEC's staff treatment, however, significantly enhances the viability and capital efficiency of in-kind operations, making them a more attractive option for market participants.

Streamlining Bank Partnerships

Another development that may smooth the path for broker-dealers is the Federal Reserve's withdrawal of earlier supervisory letters on April 24, 2025. These letters previously established advance-notice expectations for certain crypto-asset and dollar token activities, effectively moving bank engagement with digital assets toward more routine supervisory channels. For broker-dealers who rely on bank sub-custody as a crucial control-location pathway, this shift is substantial. It has the potential to shorten the typically lengthy process from conceptualizing a digital asset offering to gaining supervisory approval from the bank side.

Despite these facilitations, broker-dealers must continue to meticulously evidence Rule 15c3-3(c) control and maintain impeccable records in a manner that SEC examination teams can thoroughly test. Over the coming 12-18 months, the custody market is expected to gravitate towards structures that consistently produce verifiable evidence of control while effectively managing both cyber and operational risks. The fundamental decision for firms often boils down to whether the broker-dealer directly manages key material or establishes directive control through a qualified third-party control location. Each choice involves a careful balance of governance burden, incident-response design, and examiner comfort.

Operational Control Scenarios and Their Trade-offs:

• Broker-Dealer Self-Custody:
  • Where control sits: Broker-dealer directly controls keys (e.g., in an HSM or multisig).
  • Primary operational benefit: Provides a direct evidence trail for Rule 15c3-3(c) control.
  • Main execution risk: Requires robust cyber controls, adequate insurance limits, and comprehensive auditability at scale.
• Bank Sub-Custody with Broker-Dealer Directive Rights:
  • Where control sits: Bank acts as the control location, but the broker-dealer directs movements.
  • Primary operational benefit: Leverages a familiar custody perimeter for incumbent financial institutions.
  • Main execution risk: Contract terms and operational playbooks must unequivocally prove control during incidents.
• Crypto Custodian Technology with Bank or Trust Wrapper:
  • Where control sits: Specialist tooling provides control, framed by comprehensive agreements with a bank or trust.
  • Primary operational benefit: Access to advanced specialist technology and defined control agreements.
  • Main execution risk: Ensuring seamless integration speed for tokenized security workflows and consistent qualification and supervision of the control location.
• Smart-Contract Escrow with Transfer Agent Co-sign:
  • Where control sits: Multisignature arrangement between the broker-dealer and a transfer agent.
  • Primary operational benefit: Enables programmable controls for corporate actions directly on-chain.
  • Main execution risk: How exam teams will test "control" and recordkeeping over time for such innovative structures.

Transparency for Retail Investors and The Road Ahead

The December 17 refresh also maintains a clear boundary for retail-facing firms: non-security crypto assets held at a broker-dealer remain outside the purview of Rule 15c3-3(b). This underscores the continuing necessity for firms to provide unambiguous disclosures to their clients, clearly outlining which regulatory protections apply to their digital assets and, crucially, which do not.

Commissioner Hester Peirce has characterized these staff FAQs as incremental, yet she acknowledges their potential to significantly lower friction for market participants striving to integrate on-chain activities into existing regulatory frameworks. For compliance teams, the immediate indicators to watch will be any further edits or additions to the SEC FAQ index. Another vital signal will be whether FINRA’s interpretations evolve to include standardized examiner checklists for on-chain control evidence and the associated books and records, providing clearer operational guidelines for this rapidly evolving sector.