More than two years after the U.S. Securities and Exchange Commission (SEC) introduced a new class of “special purpose broker-dealers” authorized to custody crypto asset securities, the first special purpose broker-dealer (SPBD) appears to have been approved. Prometheum Ember Capital LLC, a registered broker-dealer, now also appears to be approved to operate as an SPBD.
SPBDs
The SPBD regime was first introduced by the SEC in December 2020. Unlike other broker-dealers and alternative trading systems, which could transact in crypto asset securities upon FINRA (the Financial Industry Regulatory Authority) approval, but could not custody these assets, SPBDs are permitted to both custody and transact in crypto asset securities. However, the SPBD regime is also subject to a number of stringent conditions. Among other things, an entity registering as an SPBD must:
What’s Next?
Some of the conditions required for SPBDs may have made being an SPBD an unattractive option for many broker-dealers. For example, many brokers viewed as overly restrictive the fact that SPBDs cannot custody or transact in crypto asset non-securities (such as bitcoin), or in crypto assets that are not registered or exempt from registration under the federal securities laws. These two restrictions prevented SPBDs from custodying or transacting in the vast majority of crypto assets, including the most liquid assets, as well as the ones with high market capitalizations.
Now that an SPBD appears to have been approved, the likely next question is to ask which crypto assets are available for this entity to trade. There seem to only be a handful of crypto asset securities that are either registered or issued pursuant to an available exemption, and these securities have typically been very thinly traded. Will the SEC relax some or all of the conditions for SPBDs, including on the types of crypto assets it can trade? We must continue to watch this space.
If you have questions about the SPBD regime and registration process, or about crypto assets more generally, please contract Amy Caiazza (202 973 8887), Neel Maitra (202 973 8827), or another member of Wilson Sonsini’s fintech and financial services practice.