A new custody framework issued Wednesday by the Securities and Exchange Commission’s Division of Trading and Markets introduces a strict compliance capability for broker-dealers: the power to “burn” customer assets.
The staff statement, released as an interim guide for applying Rule 15c3-3 to digital assets, explicitly conditions regulatory compliance on a firm’s ability to override the immutable nature of blockchain technology. To maintain “physical possession” of crypto asset securities, the guidance stipulates that a broker-dealer must have established policies to “comply with a lawful order as to seizing, freezing, burning or prevention of transfer” of the assets.
The “Burn” Mandate
The inclusion of “burning, “the process of permanently destroying a digital asset, typically by sending it to an irretrievable address, marks a significant escalation in regulatory requirements.
While traditional securities can be cancelled by a transfer agent, crypto assets on decentralized ledgers are designed to be immutable. By requiring the capability to “burn” or “freeze” assets upon receipt of a lawful order, the guidance effectively requires broker-dealers to maintain a level of centralized control that may be technically impossible on certain censorship-resistant networks without centralized middleware or “wrapper” tokens.
SEC Staff View vs. Commission Rule
It is critical to note that this document is a “Staff Statement” from the Division of Trading and Markets, not a formal rule voted on by the five-member Commission. The text includes a standard disclaimer that it “has no legal force or effect” and creates no new obligations.
However, in practice, these statements function as the de facto rulebook for compliance. Broker-dealers that fail to adhere to these “views” risk enforcement action for violating the Customer Protection Rule.
The Division explicitly framed this as a “no-action” style roadmap, stating they “will not object” to firms custodying assets only if these specific conditions are met.
Operational Risk Transfer
Beyond the seizure requirements, the guidance shifts the burden of protocol risk assessment entirely onto the broker-dealer. Firms are required to conduct deep diligence on the “distributed ledger technology and associated network” before accepting an asset.
Specifically, firms must have pre-planned procedures for:
- 51% Attacks: Detecting and defending against network takeovers.
- Hard Forks: Deciding how to handle chain splits.
- Airdrops: Managing unsolicited asset distributions.
The guidance forbids firms from maintaining custody if they identify “material security or operational problems,” effectively forcing broker-dealers to act as gatekeepers for which blockchains are deemed safe for institutional capital.
Segregation of Keys
The statement also reinforces strict internal controls, likely a response to the failures seen in the 2022 collapse of FTX. It mandates that “no other person,” including a broker-dealer’s affiliates, may have access to the private keys. This provision appears to preclude commingled wallet structures often used by crypto conglomerates that operate both trading desks and exchanges.
Chain Street’s Take
The “burn” clause is the tell. The SEC isn’t trying to fit crypto into banking laws; they are forcing crypto to become a bank deposit.
By demanding the ability to freeze and destroy assets, the Division is signaling that “code is law” has no place in a regulated brokerage. If a broker-dealer must be able to burn your tokens on a judge’s order, they aren’t really holding your crypto, they are holding a database entry backed by a private key they control.
This guidance pushes the industry toward permissioned chains and tokenized securities, while making it operationally hazardous for any regulated firm to touch true, immutable DeFi assets.
