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SEC: Broker-Dealers With Custody Must Comply With Customer Protection Rule

US SEC

Countless crypto firms have been waiting to snag operating licenses from the Securities Exchange Commission (SEC). The Joint Staff Statement on Broker-Dealer Custody of Digital Asset Securities is finally broaching the law as pertains to crypto. The July 8 statement is a collaborative effort between the SEC and the Financial Industry Regulatory Authority (FINRA).

The two bodies have been in
discussions with digital asset securities industry stakeholders seeking
broker-dealer certification.  Gemini the
crypto exchange is one of the most recent firms seeking said approval. The
joint statement has, as a result, outlined factors that the regulators will use
when granting or denying the permissions to crypto companies.

Similarly, the statement has addressed
the confusion on custody solutions for digital asset securities. Companies have
sought to market them to institutional investors who cannot directly purchase
or hold the assets themselves.

The SEC Clarification

Consequently, questions have arisen as
to whether digital assets should be treated as securities as per the law. The
Securities Investor Protection Act (SIPA) of 1970 was made before digital asset
era and was therefore incapacitated in its definition.

Of the matter, the regulators have defined a cryptocurrencies as assets issued and transferred on a blockchain or distributed ledger technology. For regulatory purposes, a digital asset that qualifies as security has to be referred to as “digital asset security” by registration.

Likewise, there has been a lot of confusion over the SEC‘s Customer Protection Rule. A broker-dealer in the US has to be legally registered to operate, to protect the customers. This license gives its operator the right to purchase and sell securities either for their clients or for themselves. 

The statement withheld the need for digital asset broker-dealers to comply with the security laws. The report also adds that:

” if the entity is a broker-dealer, it must comply with broker-dealer financial responsibility rules, including, as applicable, custodial requirements under Rule 15c3-3 under the Securities Exchange Act of 1934 (the “Exchange Act”), which is known as the Customer Protection Rule.”

Customer Protection Is Essential

The rule requires a broker-dealer to either physically hold their customer’s assets or maintain them at no charges in a control location.  However, broker-dealers in the digital assets market are at a higher risk of becoming victims or perpetrators of theft, fraud, or loss of private keys due to crypto nature. 

There is additional confusion as to who should maintain the asset’s private keys between the broker-dealer and third-party custodian. The statement, therefore, emphasizes the critical need for reporting and record keeping adding that:

 ” Financial responsibility rules also require that broker-dealers routinely prepare financial statements including various supporting schedules particular to broker-dealers, such as Computation of Net Capital under Rule 15c3-1 and Information Relating to the Possession or Control Requirements under Rule 15c3-3 under the Exchange Act”

Congress set the regulatory bodies on crypto assets in the wake of the 2017 BTC Bull Run and ICO hype fall out. Seeking to curb fraud and protect the consumers, the House came up with bills that were passed to the Commodity Futures Trading Commission (CFTC) for recommendations. The CFTC took on ETH and BTC and passed the rests of the responsibility to the SEC. The SEC since then has been cracking down on crypto over registrations, threatening progress.

The post SEC: Broker-Dealers With Custody Must Comply With Customer Protection Rule appeared first on Ethereum World News.

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US SEC Solicits Feedback on Crypto Assets and Custody Rules

The US SEC is soliciting industry input as it potentially reconsiders existing custody rules for investment advisers regarding crypto.

The United States Securities and Exchange Commission (SEC) is soliciting industry input as it potentially reconsiders existing custody rules in specific cases of digital asset trading and settlement.

The SEC launched its information gathering initiative in an open letter to Karen Barr, president and CEO of the Investment Adviser Association, on March 12.

Currently, the Custody Rule (Rule 206(4)-2) of the Investment Advisers Act of 1940 determines rules that aim to protect investors who delegate custody of their funds or securities to professional investment advisors.

As the letter outlines, such custodial authority carries an ”increased risk of misappropriation or misuse of [investors’] assets,” and investment advisors are thus legally bound to register with the SEC and to comply with a series of rules for sound custodial practices.

The SEC states that its appeal for input regards the application of the Custody Rule to digital assets, and more specifically as to whether any revisions to the rule might be necessary “regarding the regulatory status of investment adviser and custodial trading practices that are not processed or settled on a delivery versus payment (“Non-DVP”) basis.”

A DVP settlement procedure is where a buyer’s payment for a given security is due at the same time as that security’s delivery.

As Katherine Wu — director of business development at New York City-based crypto research firm Messari — has noted in her coverage of the SEC initiative, an example of DVP at work is the US DTC (Depository Trust Corporation) system. Here, the DTC clearing house acts as an SEC-registered custodian and intermediary that ensures the secure payment and transfer of securities between parties.

In cases of non-DVP settlement procedures — i.e. where payment is made after the delivery of a security —  the settlement risk is deemed to be higher.

The SEC is thus soliciting input on non-DVP settlement in the digital asset space, regarding both the settlement process of peer-to-peer digital asset transactions, as well as intermediated settlement that involve exchanges or over-the-counter trading platforms.

Among the questions in its letter, the SEC solicits information on what types of digital asset instruments trade on a non-DVP basis, what role custodians play in non-DVP digital asset trading and how they currently mitigate risks.

Wu, who worked as a legal intern at the SEC prior to her crypto industry involvement, has given her perspective on the agency’s first move:

“What’s interesting to me is that the SEC does not seem to be jumping the gun in subjecting all non-DVP trades as under the custody rule, but rather is posing this as an opportunity for them to assess the underlying custody risks.”  

As reported, the SEC’s chairman Jay Clayton has recently emphasized that custodial practices are a particular area of scrutiny as the agency mulls the regulation of new, prospective crypto investment instruments such as exchange-traded funds.

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Following Fidelity’s Bitcoin Soft Launch, IBM Delves Into Crypto Custody

New York Firm Launches Crypto Offering

2018 may have seen Bitcoin (BTC) fall by over 70%, but institutions and powerhouses in traditional industries are still actively seeking to get their foot into the crypto door. CoinDesk reports that blockchain-friendly IBM, one of the largest forward-thinking technology companies across the globe, has quietly entered into the cryptocurrency custody space with a little-known partner.

The outlet’s Ian Allison writes that Shuttle Holdings, a New York-headquartered investment group, will be launching custodial services for this newfangled asset class sometime in late-March. Shuttle has purportedly built the offering on IBM’s private cloud service, backed by the Corporate America darling’s encryption technology. It is important to note that Shuttle is offering the tools for cryptocurrency custody, rather than handling the nitty-gritty itself.

Much like other institutional plays in this budding space, Shuttle has started small, offering its solution to a hand-picked list of clients that it believes can handle the cryptocurrency stress. Eventually, however, the company intends to see banks, brokers, custodians, family offices, along with other institutional subsets dabble in the storage of cryptocurrency.

Shuttle and IBM’s venture is not exactly what Bitcoin traditionalists would call cold storage. As hinted at earlier, private keys will be stored not on a device in a vault, but in the cloud (private that is) and secured by a number of layers of industrial-grade encryption. In a presentation at an IBM event, Shuttle’s Brad Chun explained that it sought to harness this method of custody as firms need their cryptocurrency often at a moment’s notice, with a digital system being much more efficient in that regard. He even states that by some measures, Shuttle’s tools will be “just as secure, if not more secure” than regular cold wallets, some of which were proven to have massive security vulnerabilities over recent months. Explaining more about the project, Chun told CoinDesk:

“There are always trade-offs between security and efficiency, but we do not utilize a traditional cold storage system. Instead, we keep keys at rest encrypted in multiple layers as data blobs so that an organization can store these backups using their pre-existing disaster recovery and backup processes and media.”

Interestingly, Chun mentioned that he attempts to push Shuttle’s custody service to eventually service real world asset-backed tokens, like those for real estate (land titles), shares of both private and public standing, among others. As Anthony Pompliano, Jeremy Allaire, among others are pushing for a tokenized world, this may only make sense.

This offering comes after IBM’s blockchain head, Jesse Lund, told reporters that he expects Bitcoin to end the year at $5,000 before skyrocketing to $1 million as time elapses.

Custody: A Growing Trend

This, of course, only underscores the industry trend of custody of digital assets. Per previous reports,  it has been officially confirmed that Fidelity Digital Asset Services (FDAS), the first fully-fledged crypto platform backed by Wall Street, has gone live. In a number of interviews with cryptocurrency outlets this week, Tom Jessop, a former Goldman Sachs executive turned head of FDAS, explained that his brainchild’s offerings are live for a select list of “eligible clients.” Jessop adds that at the moment, the platform only supports Bitcoin, and will be staving off its verdict on Ethereum due to impending blockchain upgrades.

Photo by Annie Spratt on Unsplash

The post Following Fidelity’s Bitcoin Soft Launch, IBM Delves Into Crypto Custody appeared first on Ethereum World News.

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Gazprombank Announces Launch of Crypto Custody Service By Mid-2019

Gazprombank, the banking division of Russian giant Gazprom is working with Avaloq and Metaco to provide crypto asset custody services for institutional clients next year.

According to an official press release issued on 6 December, METACO expressed that the strategic decision is part of a joint effort that has been going on for some time. They are also confident that this service will start operating in the second quarter of next year:

Fintech leader Avaloq and crypto-asset custody infrastructure specialist METACO* have entered into an innovation partnership with Gazprombank (Switzerland) Ltd, a Swiss bank, to implement their integrated crypto asset solution. This product innovation aims to provide banks and wealth managers with a fully integrated solution for the management of client portfolios across all asset classes including cryptocurrencies. Gazprombank (Switzerland) Ltd, which is already an Avaloq client, aims to offer a cryptocurrency service to its clients in mid-2019.

According to information from the three firms involved, the service will focus on security. For this purpose, Gazprombank will develop a product using the SILO technology, a “highly secure crypto-asset custody solution for institutional clients” created by METACO. In turn, this product will run within the Avaloq Banking Suite.

Part of METACO team during SILO’s launch

Gazprom is Entering The Crypto-Verse With a Secure, User-Friendly Custody Service

Thomas Beck, Group CTO at Avaloq, assured that the partnership will offer a product not only with high-quality standards but also highly user-friendly.

For both institutions and bank clients, trust is key. Avaloq and METACO have considered this for the development of a fully integrated solution that can be offered to clients by their trusted bank. Thanks to the close integration of the METACO storage solution, banking and wealth management customers won’t have to trust additional third parties when trading with cryptocurrencies. By bringing together all asset classes in one portfolio view, the solution will also ensure the highest levels of convenience and usability.

Despite maintaining a stance sometimes contrary to the use of cryptocurrencies, Russian policy has shown great interest in the development of blockchain technologies. As Gazprom is a key industry for the Russian economy (Gazprom is the leading supplier of gas in Europe), it is possible that this decision will lighten the harsh vision of the state in this regard.

It is also important to note that Gazprombank is a company domiciled in Switzerland, so there are no legal problems that could complicate the operation of the new crypto custody service.

The post Gazprombank Announces Launch of Crypto Custody Service By Mid-2019 appeared first on Ethereum World News.

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Goldman Sachs Could Support Crypto Custody In The Near Future

Cryptocurrency custody services are seen by many as the next step for institutional adoption. As per a Bloomberg report released on Monday morning, Goldman Sachs, one of the most respected financial institutions in the world, is considering the creation of an in-house custody service.

This news comes only a few months after Goldman Sachs began to trade Bitcoin futures for its clients, with this being the first substantial move that the firm took to back the crypto industry.

Citing people familiar with the matter, Bloomberg journalists pointed out that this service, if created, would be aimed at clients (likely institutional investors/firms) looking to safeguard their valuable crypto-asset investments from cyberattacking attempts. The unnamed insiders clarified that no solid plan is set in place yet, adding that there also isn’t a definitive timeline for the development and potential release of this service.

While custody doesn’t sound like much on the surface, it is likely that the release of a fully fledged Goldman-backed crypto service would hail in the next round of institutional involvement, likely pushing innovation and prices in this nascent industry to new all-time highs.

However, a custody service may not be the be all and end all of the firm’s crypto-related aspirations. The insiders went on to note that a successful custody offering could lead the New York-based financial giant to launch other crypto-focused ventures, such as a prime brokerage in upcoming years.

While neither confirming or denying the existence of a move towards custody, a representative of Goldman Sachs stated:

“In response to client interest in various digital products we are exploring how best to serve them in this space. At this point we have not reached a conclusion on the scope of our digital asset offering.”

Oddly enough, this news comes only a few days after the firm’s investment strategy group (ISG) revealed that they hold an aversion to cryptocurrencies. In a report from Goldman’s ISG, investment officers at the firm noted that they expect cryptocurrency values to decline moving into the future, adding that cryptos do not hold the prerequisites required to be classified as bona-fide currencies.

While this was an overall set of bearish sentiment, Nathaniel Popper, the author of Digital Gold and a well-known journalist at the New York Times, pointed out that this is only the sentiment held by one portion of the firm’s expansive employee base.

Goldman Isn’t The Only Wall Street Firm To Step Into The Crypto Boxing Ring

It is important to note that Goldman is not the only legacy market-centric firm to make a foray into cryptocurrency-related products, or custody to be more specific.

As reported by Ethereum World News in early-June, Fidelity Investments, an American finanical services firm with $2.5 trillion under management, has begun work on a “first-in-class custodian service for Bitcoin and other digital currencies.”

Pete Chercewich, the President of Northern Trust’s corporate and institutional services subsidiary,  told Bloomberg that his firm has also begun to develop a method of reliably securing crypto assets. The executive of the financial giant also noted that the plan is to offer custody support at industry-low fees, beating out the relatively high cost of alternative institutional-focused security solutions.

While taking into account the moves made by a multitude of Wall Street firms, it becomes apparent that Goldman may have some competition to deal with when it comes to offering the most reliable crypto services, for the most affordable prices.

Image Courtesy of Jason Baker/Flickr

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Hong Kong Investment Firm To Launch Crypto Custody Service For Institutional Investors

Hong Kong Investment Firm To Open Custody Service 

The South China Morning Post, a Hong Kong-based news source for English readers, recently revealed that a Hong Kong-based firm will be opening up a crypto-custody service in the near future.

According to the aforementioned news source, Funsang Investment Office, which is an asset management firm, has been receiving mounting interest about cryptocurrencies from its vast array of high-net-worth individuals and institutional clients.

This interest has prompted the management firm to begin discussing plans for a custody service, which Fusang’s CEO expects to open it in the fourth quarter of this year.

Henry Chong, the Chief Executive Officer of the firm, elaborated on the plans for service, stating that “Fusang Vault,” as the project is now called, will hold crypto assets for clients, while also auditing the funds on a periodic basis.

Chong went on to talk about why a service like Fusang Vault is needed, drawing connections between financial bonds and cryptos, further noting that crypto assets lack ownership data, unlike something like a land deed. He stated:

“Digital assets are akin to bearer bonds, whereby whoever that is holding the security is presumed to be the owner and there is no registration of ownership information of the security. Hence, the way we keep digital asset [sic] secured is of paramount importance.”

The CEO also pointed out that his firm is currently working with insurers, attempting to work out a system where client’s crypto assets can be covered under new insurance policies.

Growing Need For Institutional Investor Services, Especially in Asia

Institutional investment and interest have long been held as the holy grail of cryptocurrencies, with many expecting that an influx of institutional capital will bring this industry to the mainstream.

However, this industry currently doesn’t have the proper infrastructure to host many institutional clients. Additionally, the current state of the market encourages speculative behaviors, with a majority of retail investors looking to make a quick buck. Institutional investors, like the many notable Wall Street investment firms, have seen that, and have mostly shied away from opening their wallets for the industry.

But institutional sentiment regarding this market is quickly changing, with firms like Coinbase, Blockchain, and Circle all opening up services aimed at attracting investors from legacy markets. These services have already been met with success, despite their youth, with Coinbase Custody already reporting millions under management and Circle seeing billions in trade volume each and every month.

But as pointed out by Blockchain CEO Peter Smith, a majority of institutional clients are currently based in the U.S. and Western Europe, essentially leaving out the Asian market.

Despite being seen as the home of cryptocurrencies, institutional firms based in Asia have hesitated to invest into the cryptocurrency industry. This is why a service like Fusang Vault is important, opening up the industry to an array of new investors and institutional capital.

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