Federal Register / Vol. 86, No. 37 / Friday, February 26, 2021 / Rules and Regulations 11627 

1For purposes of this statement, the term ‘‘digital 

asset’’ refers to an asset that is issued and/or 

transferred using distributed ledger or blockchain 

technology (‘‘distributed ledger technology’’), 

including, but not limited to, so-called ‘‘virtual 

currencies,’’ ‘‘coins,’’ and ‘‘tokens.’’ The focus of 

this statement is digital assets that rely on 

cryptographic protocols. A digital asset may or may 

not meet the definition of a ‘‘security’’ under the 

federal securities laws. See, e.g., Report of 

Continued 

Class E airspace extending upward from 

700 feet above the surface. To properly 

contain IFR departures to 1,200 feet 

above the surface, the 6.4-mile radius of 

the airport is increased to a 7.5-mile 

radius of the airport. 

Further, this action removes the Harry 

Strunk NDB from the airspace text 

header and the airspace description. 

The navigation aid (NAVAID) is being 

decommissioned and is not needed to 

describe the airspace. 

Lastly, this action corrects the 

airport’s geographic coordinates to lat. 

40°18′24′′ N, long. 100°09′43′′ W. 

FAA Order 7400.11, Airspace 

Designations and Reporting Points, is 

published yearly and effective on 

September 15. 

Regulatory Notices and Analyses 

The FAA has determined that this 

regulation only involves an established 

body of technical regulations for which 

frequent and routine amendments are 

necessary to keep them operationally 

current, is non-controversial, and 

unlikely to result in adverse or negative 

comments. It, therefore: (1) Is not a 

‘‘significant regulatory action’’ under 

Executive Order 12866; (2) is not a 

‘‘significant rule’’ under DOT 

Regulatory Policies and Procedures (44 

FR 11034; February 26, 1979); and (3) 

does not warrant preparation of a 

regulatory evaluation as the anticipated 

impact is so minimal. Since this is a 

routine matter that will only affect air 

traffic procedures and air navigation, it 

is certified that this rule, when 

promulgated, would not have a 

significant economic impact on a 

substantial number of small entities 

under the criteria of the Regulatory 

Flexibility Act. 

Environmental Review 

The FAA has determined that this 

action qualifies for categorical exclusion 

under the National Environmental 

Policy Act in accordance with FAA 

Order 1050.1F, ‘‘Environmental 

Impacts: Policies and Procedures,’’ 

paragraph 5–6.5a. This airspace action 

is not expected to cause any potentially 

significant environmental impacts, and 

no extraordinary circumstances exist 

that warrant the preparation of an 

environmental assessment. 

List of Subjects in 14 CFR Part 71 

Airspace, Incorporation by reference, 

Navigation (air). 

Adoption of the Amendment 

In consideration of the foregoing, the 

Federal Aviation Administration 

amends 14 CFR part 71 as follows: 

PART 71—DESIGNATION OF CLASS A, 

B, C, D, AND E AIRSPACE AREAS; AIR 

TRAFFIC SERVICE ROUTES; AND 

REPORTING POINTS 

■ 1. The authority citation for 14 CFR 

part 71 continues to read as follows: 

Authority: 49 U.S.C. 106(f), 106(g), 40103, 

40113, 40120; E.O. 10854, 24 FR 9565, 3 CFR, 

1959–1963 Comp., p. 389. 

§ 71.1 [Amended] 

■ 2. The incorporation by reference in 

14 CFR 71.1 of FAA Order 7400.11E, 

Airspace Designations and Reporting 

Points, dated July 21, 2020, and 

effective September 15, 2020, is 

amended as follows: 

Paragraph 6005 Class E Airspace Areas 

Extending Upward From 700 Feet or More 

Above the Surface of the Earth. 

* * * * * 

ACE NE E5 Cambridge, NE [AMENDED] 

Cambridge Municipal Airport, NE 

(Lat. 40°18′24′′ N, long. 100°09′43′′ W) 

That airspace extending upward from 700 

feet above the surface within a 7.5-mile 

radius of Cambridge Municipal Airport. 

Issued in Seattle, Washington, on February 

16, 2021. 

B.G. Chew, 

Acting Group Manager, Operations Support 

Group, Western Service Center. 

[FR Doc. 2021–03905 Filed 2–25–21; 8:45 am] 

BILLING CODE 4910–13–P 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Part 240 

[Release No. 34–90788; File No. S7–25–20] 

Custody of Digital Asset Securities by 

Special Purpose Broker-Dealers 

AGENCY: Securities and Exchange 

Commission (‘‘Commission’’). 

ACTION: Commission statement; request 

for comment. 

SUMMARY: The Commission is issuing a 

statement and requesting comment 

regarding the custody of digital asset 

securities by broker-dealers. 

DATES:

Effective date: April 27, 2021. 

Comments due: You may submit 

comments at any time throughout the 

five-year term of this Commission 

Statement. 

ADDRESSES: Comments may be 

submitted by any of the following 

methods: 

Electronic Comments 

• Use the Commission’s internet 

comment form (https://www.sec.gov/ 

rules/submitcomments.htm); or 

• Send an email to rule-comments@

sec.gov. Please include File No. S7–25– 

20 on the subject line. 

Paper Comments 

• Send paper comments to Secretary, 

Securities and Exchange Commission, 

100 F Street NE, Washington, DC 

20549–1090. 

All submissions should refer to File 

Number S7–25–20. This file number 

should be included on the subject line 

if email is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method of submission. The 

Commission will post all comments on 

the Commission’s website (http://

www.sec.gov). Comments are also 

available for website viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street NE, 

Washington, DC 20549, on official 

business days between the hours of 

10:00 a.m. and 3:00 p.m. All comments 

received will be posted without change. 

Persons submitting comments are 

cautioned that we do not redact or edit 

personal identifying information from 

comment submissions. You should 

submit only information that you wish 

to make publicly available. 

FOR FURTHER INFORMATION CONTACT: 

Michael A. Macchiaroli, Associate 

Director, at (202) 551–5525; Thomas K. 

McGowan, Associate Director, at (202) 

551–5521; Randall W. Roy, Deputy 

Associate Director, at (202) 551–5522; 

Raymond A. Lombardo, Assistant 

Director, at 202–551–5755; Timothy C. 

Fox, Branch Chief, at (202) 551–5687; or 

A.J. Jacob, Special Counsel, at (202) 

551–5583, Division of Trading and 

Markets, Securities and Exchange 

Commission, 100 F Street NE, 

Washington, DC 20549–7010. 

SUPPLEMENTARY INFORMATION: 

I. Introduction 

The Commission is issuing this 

statement and request for comment to 

encourage innovation around the 

application of the Customer Protection 

Rule to digital asset securities.1 The 


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11628 Federal Register / Vol. 86, No. 37 / Friday, February 26, 2021 / Rules and Regulations 

Investigation Pursuant to Section 21(a) of the 

Securities Exchange Act of 1934: The DAO, 

Exchange Act Release No. 81207 (July 25, 2017). As 

used in this statement, a ‘‘digital asset security’’ 

means a digital asset that meets the definition of a 

‘‘security’’ under the federal securities laws. A 

digital asset that is not a security is referred to 

herein as a ‘‘non-security digital asset.’’ 

2See 17 CFR 240.15c3–3. The Commission staff 

has issued a joint statement with the Financial 

Industry Regulatory Authority on broker-dealer 

custody of digital asset securities (‘‘Joint 

Statement’’), as well as a no-action letter regarding 

the Joint Statement to broker-dealers operating 

alternative trading systems (‘‘ATSs’’). See Joint Staff 

Statement on Broker-Dealer Custody of Digital Asset 

Securities, dated July 8, 2019, available at https:// 

www.sec.gov/news/public-statement/joint-staffstatement-broker-dealer-custody-digital-assetsecurities. See also Letter to Ms. Kris Dailey, 

Financial Industry Regulatory Authority, ATS Role 

in the Settlement of Digital Asset Security Trades, 

dated September 25, 2020 (discussing a three-step 

process broker-dealers use when operating an 

alternative trading system for the purpose of trading 

digital asset securities), available at https://

www.sec.gov/divisions/marketreg/mr-noaction/ 

2020/finra-ats-role-in-settlement-of-digital-assetsecurity-trades-09252020.pdf. Staff statements 

represent the views of the staff. They are not rules, 

regulations, or statements of the Commission. The 

Commission has neither approved nor disapproved 

their content. These staff statements, like all staff 

guidance, have no legal force or effect: they do not 

alter or amend applicable law, and they create no 

new or additional obligations for any person. 

3See 17 CFR 240.15c3–3. 

4See 17 CFR 240.15c3–3(b). 

5Pursuant to the Congressional Review Act, the 

Office of Information and Regulatory Affairs has 

designated this statement as a ‘‘major rule’’ as 

defined by 5 U.S.C. 804(2). See 5 U.S.C. 801 et seq. 

6 15 U.S.C. 78aaa, et seq. Under SIPA, customers’ 

securities held by a broker-dealer that is a member 

of the Securities Investor Protection Corporation 

and customers’ cash on deposit at such a brokerdealer for the purpose of purchasing securities 

would be isolated and readily identifiable as 

‘‘customer property’’ and, consequently, available 

to be distributed to customers ahead of other 

creditors in the event of the broker-dealer’s 

liquidation. Id. 

7See Net Capital Requirements for Brokers and 

Dealers, Exchange Act Rel. No. 21651 (Jan. 11, 

1985), 50 FR 2690, 2690 (Jan. 18, 1985) (Rule 15c3– 

3 is designed ‘‘to give more specific protection to 

customer funds and securities, in effect forbidding 

brokers and dealers from using customer assets to 

finance any part of their businesses unrelated to 

servicing securities customers; e.g., a firm is 

virtually precluded from using customer funds to 

buy securities for its own account’’). 

8See 17 CFR 240.15c3–3(b)(1). 

9See generally, Report of the Attorney General’s 

Cyber Digital Task Force: Cryptocurrency 

Enforcement Framework (October 2020), at 15–16, 

available at https://www.justice.gov/ag/page/file/ 

1326061/download. 

Commission envisions broker-dealers 

performing the full set of broker-dealer 

functions with respect to digital asset 

securities—including maintaining 

custody of these assets—in a manner 

that addresses the unique attributes of 

digital asset securities and minimizes 

risk to investors and other market 

participants.2 Consequently, as 

discussed below, the Commission’s 

position in this statement is premised 

on a broker-dealer limiting its business 

to digital asset securities to isolate risk 

and having policies and procedures to, 

among other things, assess a given 

digital asset security’s distributed ledger 

technology and protect the private keys 

necessary to transfer the digital asset 

security. In this way, the Commission is 

cognizant of both investor protection 

and potential capital formation 

innovations that could result from 

digital asset securities. 

Rule 15c3–3 under the Securities 

Exchange Act of 1934 (hereinafter the 

‘‘Customer Protection Rule’’ or ‘‘Rule 

15c3–3’’) 3 requires a broker-dealer to 

promptly obtain and thereafter maintain 

physical possession or control of all 

fully-paid and excess margin securities 

it carries for the account of customers.4

Market participants have raised 

questions concerning the application of 

the Customer Protection Rule to the 

potential custody of digital asset 

securities for customers by brokerdealers. The Commission is requesting 

comment in this area to provide the 

Commission and its staff with an 

opportunity to gain additional insight 

into the evolving standards and best 

practices with respect to custody of 

digital asset securities. The Commission 

intends to consider the public’s 

comments in connection with any 

future rulemaking or other Commission 

action in this area. 

As an interim step, in addition to the 

request for comment, the Commission is 

issuing this statement. The Commission 

recognizes that the market for digital 

asset securities is still new and rapidly 

evolving. The technical requirements for 

transacting and custodying digital asset 

securities are different from those 

involving traditional securities. And 

traditional securities transactions often 

involve a variety of intermediaries, 

infrastructure providers, and 

counterparties for which there may be 

no analog in the digital asset securities 

market. The Commission supports 

innovation in the digital asset securities 

market to develop its infrastructure. 

In particular, the Commission’s 

position, which will expire after a 

period of five years from the publication 

date of this statement, is that a brokerdealer operating under the 

circumstances set forth in Section IV 

will not be subject to a Commission 

enforcement action on the basis that the 

broker-dealer deems itself to have 

obtained and maintained physical 

possession or control of customer fully 

paid and excess margin digital asset 

securities for the purposes of paragraph 

(b)(1) of Rule 15c3–3.5 These brokerdealers will be subject to examination 

by the Financial Industry Regulatory 

Authority (‘‘FINRA’’) and Commission 

staff to review whether the firm is 

operating in a manner consistent with 

the circumstances described in Section 

IV below. 

The five-year period in which the 

statement is in effect is designed to 

provide market participants with an 

opportunity to develop practices and 

processes that will enhance their ability 

to demonstrate possession or control 

over digital asset securities. It also will 

provide the Commission with 

experience in overseeing broker-dealer 

custody of digital asset securities to 

inform further action in this area. 

II. Background 

Customers who use broker-dealers 

registered with the Commission to 

custody their securities (and related 

cash) benefit from the protections 

provided by the federal securities laws, 

including the Customer Protection Rule 

and, in most cases, the Securities 

Investor Protection Act of 1970 

(‘‘SIPA’’).6 Generally, the Commission’s 

Customer Protection Rule requires a 

broker-dealer to segregate customer 

securities and related cash from the 

firm’s proprietary business activities, 

other than those that facilitate customer 

transactions.7 The rule requires the 

broker-dealer to maintain physical 

possession or control over customers’ 

fully paid and excess margin securities.8

Broker-dealer custody of securities is 

an integral service provided to the 

securities markets. However, brokerdealer custody of digital asset securities 

raises certain compliance questions 

with respect to the Customer Protection 

Rule. More specifically, while paragraph 

(b)(1) of Rule 15c3–3 requires that a 

broker-dealer ‘‘control’’ customer fully 

paid and excess margin securities, it 

may not be possible for a broker-dealer 

to establish control over a digital asset 

security with the same control 

mechanisms used in connection with 

traditional securities. Moreover, there 

have been instances of fraud, theft, and 

loss with respect to the custodianship of 

digital assets, including digital asset 

securities.9

The risks associated with digital 

assets, including digital asset securities, 

are due in part to differences in the 

clearance and settlement of traditional 

securities and digital assets. Traditional 

securities transactions generally are 

processed and settled through clearing 

agencies, depositories, clearing banks, 

transfer agents, and issuers. A brokerdealer’s employees, regulators, and 

outside auditors can contact these third 

parties to confirm that the broker-dealer 


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Federal Register / Vol. 86, No. 37 / Friday, February 26, 2021 / Rules and Regulations 11629 

10The clearance and settlement of securities that 

are not digital assets are characterized by 

infrastructure whereby intermediaries such as 

clearing agencies and securities depositories serve 

as key participants in the process. The clearance 

and settlement of digital asset securities, on the 

other hand, generally rely on few, if any, 

intermediaries and remain evolving areas of 

practices and procedures. 

11 Generally, SIPA defines the term ‘‘security’’ to 

include, among other things, any note, stock, 

treasury stock bond, debenture, evidence of 

indebtedness, any investment contract or certificate 

of interest or participation in any profit-sharing 

agreement, provided that such investment contract 

or interest is the subject of a registration statement 

with the Commission pursuant to the Securities 

Exchange Act of 1933 (15 U.S.C. 77a et seq.), and 

any put, call, straddle, option, or privilege on any 

security, or group or index of securities. See 15 

U.S.C. 78lll(14). Generally, in a SIPA liquidation, 

customers’ claims receive priority to the estate of 

customer property (generally cash and securities 

received acquired or held by the broker-dealer for 

the securities accounts of customers) over other 

creditors. See 15 U.S.C. 78fff & 78fff–2(c). In 

addition, to the extent that the estate of customer 

property is insufficient to satisfy the net equity 

claims of customers, the trustee can advance up to 

$500,000 for each customer, of which up to 

$250,000 can be used for cash claims. See 15 U.S.C. 

78fff–3(a) & (d). 

12See 17 CFR 240.15c3–3(b). 

is in fact holding the traditional 

securities reflected on its books and 

records and financial statements, 

thereby providing objective processes 

for examining the broker-dealer’s 

compliance with the Customer 

Protection Rule. Also, the traditional 

securities infrastructure has established 

processes to reverse or cancel mistaken 

or unauthorized transactions. Thus, the 

traditional securities infrastructure 

contains checks and controls that can be 

used to verify proprietary and customer 

holdings of traditional securities by 

broker-dealers, as well as processes 

designed to ensure that both parties to 

a transfer of traditional securities agree 

to the terms of the transfer. 

Digital assets that are issued or 

transferred using distributed ledger 

technology may not be subject to the 

same established clearance and 

settlement process familiar to traditional 

securities market participants.10 The 

manner in which digital assets, 

including digital asset securities, are 

issued, held, or transferred may create 

greater risk that a broker-dealer 

maintaining custody of this type of 

asset, as well as the broker-dealer’s 

customers, counterparties, and other 

creditors, could suffer financial harm. 

For example, the broker-dealer could be 

victimized by fraud or theft, could lose 

a ‘‘private key’’ necessary to transfer a 

client’s digital assets, or could transfer 

a client’s digital assets to an unintended 

address without the ability to reverse a 

fraudulent or mistaken transaction. In 

addition, malicious activity attributed to 

actors taking advantage of potential 

vulnerabilities that may be associated 

with distributed ledger technology and 

its associated networks could render the 

broker-dealer unable to transfer a 

customer’s digital assets. 

The express language of the Customer 

Protection Rule includes cash and 

securities held at the broker-dealer. 

Therefore, customers holding digital 

assets that are not securities through a 

broker-dealer could receive less 

protection for those assets than 

customers holding securities. The 

potential liabilities caused by the theft 

or loss of non-securities property from 

a broker-dealer, including digital assets 

that are not securities, could cause the 

broker-dealer to incur substantial losses 

or even fail, impacting customers and 

other creditors. As a consequence, the 

broker-dealer may need to be liquidated 

in a proceeding under SIPA. SIPA 

protection does not extend to all assets 

that may be held at a broker-dealer. 

Consequently, in a SIPA liquidation of 

a broker-dealer that held non-security 

assets, including non-security digital 

assets, investors may be treated as 

general creditors, to the extent their 

claims involve assets that are not within 

SIPA’s definition of ‘‘security.’’ 11

III. Discussion 

A broker-dealer that maintains 

custody of a fully paid or excess margin 

digital asset security for a customer 

must hold it in a manner that complies 

with Rule 15c3–3, including that the 

digital asset security must be in the 

exclusive physical possession or control 

of the broker-dealer.12 A digital asset 

security that is not in the exclusive 

physical possession or control of the 

broker-dealer because, for example, an 

unauthorized person knows or has 

access to the associated private key (and 

therefore has the ability to transfer it 

without the authorization of the brokerdealer) would not be held in a manner 

that complies with the possession or 

control requirement of Rule 15c3–3 and 

thus would be vulnerable to the risks 

the rule seeks to mitigate. 

As noted above, the loss or theft of 

digital asset securities may cause the 

firm and its digital asset customers to 

incur substantial financial losses. This, 

in turn, could cause the firm to fail, 

imperiling its traditional securities 

customers as well as the broker-dealer’s 

counterparties and other market 

participants. However, there are 

measures a broker-dealer can employ to 

comply with Rule 15c3–3 and mitigate 

these risks. 

One step that a broker-dealer could 

take to shield traditional securities 

customers, counterparties, and market 

participants from the risks and 

consequences of digital asset security 

fraud, theft, or loss would be to limit its 

business exclusively to dealing in, 

effecting transactions in, maintaining 

custody of, and/or operating an 

alternative trading system for digital 

asset securities. Thus, to operate in a 

manner consistent with the 

Commission’s position, the brokerdealer could not deal in, effect 

transactions in, maintain custody of, or 

operate an alternative trading system for 

traditional securities. In addition, by 

limiting its activities exclusively to 

digital asset securities, the broker-dealer 

would shield its customers from the 

risks that could arise if the firm engaged 

in activities involving non-security 

digital assets, which are not expressly 

governed by the Customer Protection 

Rule. For example, to the extent that the 

requirements of the Customer Protection 

Rule do not apply to non-security digital 

assets, such assets could receive less 

protection than securities, which would 

increase the risk of theft or loss and 

could ultimately cause the broker-dealer 

to fail, impacting customers and other 

creditors. 

A second step the broker-dealer could 

take is to establish, maintain, and 

enforce reasonably designed written 

policies and procedures to conduct and 

document an analysis of whether a 

digital asset is a security offered and 

sold pursuant to an effective registration 

statement or an available exemption 

from registration, and whether the 

broker-dealer has fulfilled its 

requirements to comply with the federal 

securities laws with respect to effecting 

transactions in that digital asset 

security, before undertaking to effect 

transactions in and maintain custody of 

such asset. Such policies and 

procedures should provide a reasonable 

level of assurance that any digital assets 

transacted in or held in custody by the 

broker-dealer are in fact digital asset 

securities. Utilizing such policies and 

procedures should help ensure that the 

broker-dealer is confining its business to 

digital asset securities and that such 

digital asset securities are being offered, 

sold, or otherwise transacted in 

compliance with the federal securities 

laws. 

A third step the broker-dealer could 

take is to establish, maintain, and 

enforce reasonably designed written 

policies and procedures to conduct and 

document an assessment of the 

characteristics of a digital asset 

security’s distributed ledger technology 


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11630 Federal Register / Vol. 86, No. 37 / Friday, February 26, 2021 / Rules and Regulations 

13For the purposes of this statement, a digital 

asset security’s distributed ledger technology and 

associated network includes the protocols and any 

smart contracts or applications integral to the 

operation of the digital asset security. 14For the purposes of this statement, a ‘‘51% 

attack’’ is an attack on a blockchain or distributed 

ledger in which an attacker or group of attackers 

controls a majority of the network’s hash rate, 

mining or computing power, allowing the attacker 

or group of attackers to prevent new transactions 

from being confirmed. 15For purposes of this statement, ‘‘hard forks’’ 

refer to backward-incompatible protocol changes to 

a distributed ledger that create additional versions 

of the distributed ledger, potentially creating new 

digital assets. ‘‘Airdrops’’ refer to the distribution of 

digital assets to numerous addresses, usually at no 

monetary cost to the recipient or in exchange for 

certain promotional services. ‘‘Staking’’ refers to the 

use of a digital asset in a consensus mechanism. 

16 15 U.S.C. 78lll(14). 

17See SEC v. W.J. Howey Co., 328 U.S. 293 (1946). 

and associated network 13 prior to 

undertaking to maintain custody of the 

digital asset security and at reasonable 

intervals thereafter. The assessment 

could examine at least the following 

aspects of the distributed ledger 

technology and its associated network, 

among others: (1) Performance (i.e., does 

it work and will it continue to work as 

intended); (2) transaction speed and 

throughput (i.e., can it process 

transactions quickly enough for the 

intended application(s)); (3) scalability 

(i.e., can it handle a potential increase 

in network activity); (4) resiliency (i.e., 

can it absorb the impact of a problem in 

one or more parts of its system and 

continue processing transactions 

without data loss or corruption); (5) 

security and the relevant consensus 

mechanism (i.e., can it detect and 

defend against malicious attacks, such 

as 51% attacks 14 or Denial-of-Service 

attacks, without data loss or corruption); 

(6) complexity (i.e., can it be 

understood, maintained, and improved); 

(7) extensibility (i.e., can it have new 

functionality added, and continue 

processing transactions without data 

loss or corruption); and (8) visibility 

(i.e., are its associated code, standards, 

applications, and data publicly available 

and well documented). The assessment 

also could examine the governance of 

the distributed ledger technology and 

associated network and how protocol 

updates and changes are agreed to and 

implemented. This would include an 

assessment of impacts to the digital 

asset security of events such as protocol 

upgrades, hard forks, airdrops, 

exchanges of one digital asset for 

another, or staking.15 Such assessments 

would allow a broker-dealer to be able 

to identify significant weaknesses or 

other operational issues with the 

distributed ledger technology and 

associated network utilized by the 

digital asset security, or other risks 

posed to the broker-dealer’s business by 

the digital asset security, which would 

allow a broker-dealer to take appropriate 

action to identify and reduce its 

exposure to such risks. Accordingly, if 

there are significant weaknesses or other 

operational issues with the distributed 

ledger technology and associated 

network, the broker-dealer would be 

able to determine whether it could or 

could not maintain custody of the 

digital asset security. 

A fourth step the broker-dealer could 

take is to establish, maintain, and 

enforce reasonably designed written 

policies, procedures, and controls for 

safekeeping and demonstrating the 

broker-dealer has exclusive possession 

or control over digital asset securities 

that are consistent with industry best 

practices to protect against the theft, 

loss, and unauthorized and accidental 

use of the private keys necessary to 

access and transfer the digital asset 

securities the broker-dealer holds in 

custody. These policies, procedures, 

and controls could address, among other 

matters: (1) The on-boarding of a digital 

asset security such that the brokerdealer can associate the digital asset 

security to a private key over which it 

can reasonably demonstrate exclusive 

physical possession or control; (2) the 

processes, software and hardware 

systems, and any other formats or 

systems utilized to create, store, or use 

private keys and any security or 

operational vulnerabilities of those 

systems and formats; (3) the 

establishment of private key generation 

processes that are secure and produce a 

cryptographically strong private key that 

is compatible with the distributed 

ledger technology and associated 

network and that is not susceptible to 

being discovered by unauthorized 

persons during the generation process or 

thereafter; (4) measures to protect 

private keys from being used to make an 

unauthorized or accidental transfer of a 

digital asset security held in custody by 

the broker-dealer; and (5) measures that 

protect private keys from being 

corrupted, lost or destroyed, that backup the private key in a manner that does 

not compromise the security of the 

private key, and that otherwise preserve 

the ability of the firm to access and 

transfer a digital asset security it holds 

in the event a facility, software, or 

hardware system, or other format or 

system on which the private keys are 

stored and/or used is disrupted or 

destroyed. These policies, procedures, 

and controls for safekeeping and 

demonstrating the broker-dealer has 

exclusive possession or control over 

digital asset securities should serve to 

protect against the theft, loss, and 

unauthorized and accidental use of the 

private keys and therefore the 

customers’ digital asset securities. 

A fifth step the broker-dealer could 

take is to establish, maintain, and 

enforce reasonably designed written 

policies, procedures, and arrangements 

to: (1) Specifically identify, in advance, 

the steps it intends to take in the wake 

of certain events that could affect the 

firm’s custody of the digital asset 

securities, including blockchain 

malfunctions, 51% attacks, hard forks, 

or airdrops; (2) allow the broker-dealer 

to comply with a court-ordered freeze or 

seizure; and (3) allow the transfer of the 

digital asset securities held by the 

broker-dealer to another special purpose 

broker-dealer, a trustee, receiver, 

liquidator, a person performing a similar 

function, or another appropriate person, 

in the event the broker-dealer can no 

longer continue as a going concern and 

self-liquidates or is subject to a formal 

bankruptcy, receivership, liquidation, or 

similar proceeding. These policies and 

procedures should include measures for 

ensuring continued safekeeping and 

accessibility of the digital asset 

securities, even if the broker-dealer is 

wound down or liquidated, and thus 

would provide a reasonable level of 

assurance that a broker-dealer has 

developed plans to address unexpected 

disruptions to the broker-dealer’s 

control over digital asset securities. 

A sixth step the broker-dealer could 

take is to provide written disclosures to 

prospective customers about the risks of 

investing in or holding digital asset 

securities. The disclosures could 

include, among other matters: (1) 

Prominent disclosure explaining that 

digital asset securities may not be 

‘‘securities’’ as defined in SIPA 16—and 

in particular, digital asset securities that 

are ‘‘investment contracts’’ under the 

Howey test 17 but are not registered with 

the Commission are excluded from 

SIPA’s definition of ‘‘securities’’—and 

thus the protections afforded to 

securities customers under SIPA may 

not apply with respect to those 

securities; (2) a description of the risks 

of fraud, manipulation, theft, and loss 

associated with digital asset securities; 

(3) a description of the risks relating to 

valuation, price volatility, and liquidity 

associated with digital asset securities; 

and (4) a description of the processes, 

software and hardware systems, and any 

other formats or systems utilized by the 

broker-dealer to create, store, or use the 

broker-dealer’s private keys and protect 

them from loss, theft, or unauthorized or 

accidental use (including, but not 

limited to, cold storage, key sharding, 


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Federal Register / Vol. 86, No. 37 / Friday, February 26, 2021 / Rules and Regulations 11631 

18The agreement should contain such provisions 

and disclosures as are required by applicable laws, 

rules, and regulations. 

19The Commission’s position is an agency 

statement of general applicability with future effect 

designed to implement, interpret, or prescribe law 

or policy. 

20See Heath Tarbert, Chairman, U.S. Commodity 

Futures Trading Commission, Kenneth A. Blanco, 

Director, Financial Crimes Enforcement Network, 

and Jay Clayton, Chairman, Commission, Leaders of 

CFTC, FinCEN, and SEC Issue Joint Statement on 

Activities Involving Digital Assets, dated Oct. 11, 

2019 (reminding persons engaged in activities 

involving digital assets of their anti-money 

laundering (‘‘AML’’) and countering the financing 

of terrorism (‘‘CFT’’) obligations under the Bank 

Secrecy Act, and stating that broker-dealers are 

required to implement reasonably-designed AML 

programs and report suspicious activity, and that 

such requirements are not limited in their 

application to activities involving digital assets that 

are ‘‘securities’’ under the federal securities laws), 

available at https://www.sec.gov/news/publicstatement/cftc-fincen-secjointstatementdigital

assets. 21 17 CFR. 240.15c3–1. 

multiple factor identification, and 

biometric authentication). The purpose 

of such disclosures is to provide the 

prospective customers with sufficient 

and easily understandable information 

about the risks to enable them to make 

informed decisions about whether to 

invest in or hold digital asset securities 

through the broker-dealer. 

A seventh step the broker-dealer 

could take is to enter into a written 

agreement with each customer that sets 

forth the terms and conditions with 

respect to receiving, purchasing, 

holding, safekeeping, selling, 

transferring, exchanging, custodying, 

liquidating, and otherwise transacting in 

digital asset securities on behalf of the 

customer.18 This step would ensure 

documentation of the terms of 

agreement between the customer and 

the broker-dealer providing custody of 

the customer’s digital asset security, 

which would provide greater clarity and 

certainty to customers regarding their 

rights and responsibilities under the 

agreement with the broker-dealer. 

IV. Commission Position 

The Commission’s position 19 is 

expressly limited to paragraph (b) of 

Rule 15c3–3 under the Securities 

Exchange Act of 1934 (‘‘Exchange Act’’). 

Furthermore, the Commission’s position 

does not modify or change any 

obligations of a broker-dealer, or other 

party, to otherwise comply with the 

federal securities laws, including the 

broker-dealer financial responsibility 

rules, obligations regarding proxy voting 

and beneficial ownership 

communications, as well as the brokerdealer’s obligation to become a member 

of FINRA and to comply with applicable 

anti-money laundering and countering 

the financing of terrorism obligations 

under the Bank Secrecy Act.20 All terms 

used in this Commission position will 

have the definitions set forth in Rule 

15c3–3. Finally, the Commission’s 

position, which will expire after a 

period of five years from the publication 

date of this statement, applies only to 

the exercise of its enforcement 

discretion with respect to compliance 

with paragraph (b)(1) of Rule 15c3–3 

under the circumstances set forth below. 

During this period, the Commission will 

continue to evaluate its position, and 

the circumstances set forth below, on an 

ongoing basis as it considers responses 

to the request for comments as well as 

further action in this area, including any 

future rulemaking. 

After considering the minimum steps 

that can be taken to mitigate the risks 

posed by broker-dealer custody of 

digital asset securities, for a period of 

five years, the Commission’s position is 

that a broker-dealer in the following 

circumstances would not be subject to a 

Commission enforcement action on the 

basis that the broker-dealer deems itself 

to have obtained and maintained 

physical possession or control of 

customer fully paid and excess margin 

digital asset securities: 

1. The broker-dealer has access to the 

digital asset securities and the capability 

to transfer them on the associated 

distributed ledger technology; 

2. The broker-dealer limits its 

business to dealing in, effecting 

transactions in, maintaining custody of, 

and/or operating an alternative trading 

system for digital asset securities; 

provided a broker-dealer may hold 

proprietary positions in traditional 

securities solely for the purposes of 

meeting the firm’s minimum net capital 

requirements under Rule 15c3–1,21 or 

hedging the risks of its proprietary 

positions in traditional securities and 

digital asset securities. 

3. The broker-dealer establishes, 

maintains, and enforces reasonably 

designed written policies and 

procedures to conduct and document an 

analysis of whether a particular digital 

asset is a security offered and sold 

pursuant to an effective registration 

statement or an available exemption 

from registration, and whether the 

broker-dealer meets its requirements to 

comply with the federal securities laws 

with respect to effecting transactions in 

the digital asset security, before 

undertaking to effect transactions in and 

maintain custody of the digital asset 

security; 

4. The broker-dealer establishes, 

maintains, and enforces reasonably 

designed written policies and 

procedures to conduct and document an 

assessment of the characteristics of a 

digital asset security’s distributed ledger 

technology and associated network prior 

to undertaking to maintain custody of 

the digital asset security and at 

reasonable intervals thereafter; 

5. The broker-dealer does not 

undertake to maintain custody of a 

digital asset security if the firm is aware 

of any material security or operational 

problems or weaknesses with the 

distributed ledger technology and 

associated network used to access and 

transfer the digital asset security, or is 

aware of other material risks posed to 

the broker-dealer’s business by the 

digital asset security; 

6. The broker-dealer establishes, 

maintains, and enforces reasonably 

designed written policies, procedures, 

and controls that are consistent with 

industry best practices to demonstrate 

the broker-dealer has exclusive control 

over the digital asset securities it holds 

in custody and to protect against the 

theft, loss, and unauthorized and 

accidental use of the private keys 

necessary to access and transfer the 

digital asset securities the broker-dealer 

holds in custody; 

7. The broker-dealer establishes, 

maintains, and enforces reasonably 

designed written policies, procedures, 

and arrangements to: (i) Specifically 

identify, in advance, the steps it will 

take in the wake of certain events that 

could affect the firm’s custody of the 

digital asset securities, including, 

without limitation, blockchain 

malfunctions, 51% attacks, hard forks, 

or airdrops; (ii) allow for the brokerdealer to comply with a court-ordered 

freeze or seizure; and (iii) allow for the 

transfer of the digital asset securities 

held by the broker-dealer to another 

special purpose broker-dealer, a trustee, 

receiver, liquidator, or person 

performing a similar function, or to 

another appropriate person, in the event 

the broker-dealer can no longer continue 

as a going concern and self-liquidates or 

is subject to a formal bankruptcy, 

receivership, liquidation, or similar 

proceeding; 

8. The broker-dealer provides written 

disclosures to prospective customers: (i) 

That the firm is deeming itself to be in 

possession or control of digital asset 

securities held for the customer for the 

purposes of paragraph (b)(1) of Rule 

15c3–3 based on its compliance with 

this Commission position; and (ii) about 

the risks of investing in or holding 

digital asset securities that, at a 

minimum: (a) Prominently disclose that 

digital asset securities may not be 

‘‘securities’’ as defined in SIPA—and in 

particular, digital asset securities that 

are ‘‘investment contracts’’ under the 


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11632 Federal Register / Vol. 86, No. 37 / Friday, February 26, 2021 / Rules and Regulations 

22The broker-dealer will need to retain these 

written disclosures in accordance with the brokerdealer record retention rule. See 17 CFR 240.17a– 

4(b)(4). 

23The broker-dealer will need to retain these 

written agreements in accordance with the brokerdealer record retention rule. See 17 CFR 240.17a– 

4(b)(7). 

Howey test but are not registered with 

the Commission are excluded from 

SIPA’s definition of ‘‘securities’’—and 

thus the protections afforded to 

securities customers under SIPA may 

not apply; (b) describe the risks of fraud, 

manipulation, theft, and loss associated 

with digital asset securities; (c) describe 

the risks relating to valuation, price 

volatility, and liquidity associated with 

digital asset securities; and (d) describe, 

at a high level that would not 

compromise any security protocols, the 

processes, software and hardware 

systems, and any other formats or 

systems utilized by the broker-dealer to 

create, store, or use the broker-dealer’s 

private keys and protect them from loss, 

theft, or unauthorized or accidental 

use; 22 and 

9. The broker-dealer enters into a 

written agreement with each customer 

that sets forth the terms and conditions 

with respect to receiving, purchasing, 

holding, safekeeping, selling, 

transferring, exchanging, custodying, 

liquidating and otherwise transacting in 

digital asset securities on behalf of the 

customer.23

V. Request for Comment 

The Commission is seeking comment 

on the specific questions below. When 

responding to the request for comment, 

please explain your reasoning. 

1. What are industry best practices 

with respect to protecting against theft, 

loss, and unauthorized or accidental use 

of private keys necessary for accessing 

and transferring digital asset securities? 

What are industry best practices for 

generating, safekeeping, and using 

private keys? Please identify the sources 

of such best practices. 

2. What are industry best practices to 

address events that could affect a 

broker-dealer’s custody of digital asset 

securities such as a hard fork, airdrop, 

or 51% attack? Please identify the 

sources of such best practices. 

3. What are the processes, software 

and hardware systems, or other formats 

or systems that are currently available to 

broker-dealers to create, store, or use 

private keys and protect them from loss, 

theft, or unauthorized or accidental use? 

4. What are accepted practices (or 

model language) with respect to 

disclosing the risks of digital asset 

securities and the use of private keys? 

Have these practices or the model 

language been utilized with customers? 

5. Should the Commission expand 

this position in the future to include 

other businesses such as traditional 

securities and/or non-security digital 

assets? Should this position be 

expanded to include the use of nonsecurity digital assets as a means of 

payment for digital asset securities, such 

as by incorporating a de minimis 

threshold for non-security digital assets? 

6. What differences are there in the 

clearance and settlement of traditional 

securities and digital assets that could 

lead to higher or lower clearance and 

settlement risks for digital assets as 

compared to traditional securities? 

7. What specific benefits and/or risks 

are implicated in a broker-dealer 

operating a digital asset alternative 

trading system that the Commission 

should consider for any future measures 

it may take? 

By the Commission. 

Dated: December 23, 2020. 

Vanessa A. Countryman, 

Secretary. 

[FR Doc. 2020–28847 Filed 2–25–21; 8:45 am] 

BILLING CODE 8011–01–P 

DEPARTMENT OF LABOR 

Office of the Secretary 

29 CFR Part 10 

Wage and Hour Division 

29 CFR Parts 516, 531, 578, 579, and 

580 

RIN 1235–AA21 

Tip Regulations Under the Fair Labor 

Standards Act (FLSA): Delay of 

Effective Date 

AGENCY: Wage and Hour Division, 

Department of Labor. 

ACTION: Final rule; delay of effective 

date. 

SUMMARY: Consistent with the 

Presidential directive as expressed in 

the memorandum of January 20, 2021 

from the Assistant to the President and 

Chief of Staff, entitled ‘‘Regulatory 

Freeze Pending Review,’’ this action 

finalizes the Department of Labor’s (‘‘the 

Department’’) proposal to delay until 

April 30, 2021, the effective date of the 

rule titled Tip Regulations Under the 

Fair Labor Standards Act (FLSA), 

published in the Federal Register on 

December 30, 2020, to allow the 

Department to review issues of law, 

policy, and fact raised by the rule before 

it takes effect. 

DATES: As of February 26, 2021, the 

effective date of the regulation titled Tip 

Regulations Under the Fair Labor 

Standards Act (FLSA), published in the 

Federal Register on December 30, 2020 

(85 FR 86756), is delayed until April 30, 

2021. 

FOR FURTHER INFORMATION CONTACT: 

Amy DeBisschop, Division of 

Regulations, Legislation, and 

Interpretation, Wage and Hour Division, 

U.S. Department of Labor, Room S– 

3502, 200 Constitution Avenue NW, 

Washington, DC 20210; telephone: (202) 

693–0406 (this is not a toll-free 

number). Copies of this final rule may 

be obtained in alternative formats (Large 

Print, Braille, Audio Tape or Disc), upon 

request, by calling (202) 693–0675 (this 

is not a toll-free number). TTY/TDD 

callers may dial toll-free 1–877–889– 

5627 to obtain information or request 

materials in alternative formats. 

Questions of interpretation or 

enforcement of the agency’s existing 

regulations may be directed to the 

nearest Wage and Hour Division 

(‘‘WHD’’) district office. Locate the 

nearest office by calling the WHD’s tollfree help line at (866) 4US–WAGE ((866) 

487–9243) between 8 a.m. and 5 p.m. in 

your local time zone, or log onto WHD’s 

website at https://www.dol.gov/ 

agencies/whd/contact/local-offices for a 

nationwide listing of WHD district and 

area offices. 

SUPPLEMENTARY INFORMATION: 

I. Background 

In the Consolidated Appropriations 

Act of 2018 (‘‘CAA’’), Congress 

amended section 3(m) of the Fair Labor 

Standards Act (‘‘FLSA’’ or ‘‘Act’’) to 

prohibit employers from keeping tips 

received by their employees, regardless 

of whether the employers take a tip 

credit under section 3(m). On December 

30, 2020, the Department published Tip 

Regulations Under the Fair Labor 

Standards Act (FLSA) (the ‘‘Tip Rule’’) 

in the Federal Register to address these 

amendments. See 85 FR 86756. The Tip 

Rule would also codify the Wage and 

Hour Division’s (‘‘WHD’’) guidance 

regarding the tip credit’s application to 

tipped employees who perform tipped 

and non-tipped duties. See id. The 

effective date of the Tip Rule was March 

1, 2021. See id. 

In a memorandum dated January 20, 

2021 titled ‘‘Regulatory Freeze Pending 

Review,’’ published in the Federal 

Register on January 28, 2021 (86 FR 

7424) (‘‘Regulatory Freeze 

Memorandum’’), the Assistant to the 

President and Chief of Staff, on behalf 


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