In line with its previous guidance, FINRA has granted broker-dealer (but not custodian) status to a digital asset platform.
By Stephen P. Wink, Cameron R. Kates, Shaun Musuka, and Deric Behar
In a follow-up to the July 2019 SEC and FINRA joint staff statement (Joint Statement) clarifying the regulators’ position on the custody of digital asset securities by broker-dealers, on September 27, 2019, FINRA granted broker-dealer status to a digital asset firm. The recipient, Harbor Square Investments (HSI) — a subsidiary of a San Francisco-based FinTech startup eponymously named Harbor — helps issuers of alternative investments and private securities tokenize their offerings and bring the security tokens to market on its blockchain-based platform.
Although this is one of the few membership applications approved by FINRA for a firm dealing with digital assets, the approval is for a limited-purpose private placement broker-dealer, for which custody is not required. As the authors of this post noted in Can Broker-Dealers HODL? SEC and FINRA Say Keep It Noncustodial for Now, the Joint Statement enumerated the many hurdles a broker-dealer would have to clear before being granted the right to custody digital assets. As a limited-purpose private placement broker-dealer, HSI is expected to focus on facilitating due diligence, tokenization, issuance, and liquidity among private and accredited investors.
The approval of the broker-dealer application to HSI, while deserving recognition, brings to mind the other 40-odd digital asset and blockchain-based firms awaiting disposition of their broker-dealer applications by the SEC and FINRA. To the extent those other applications involve the custody of digital assets, there has been no indication that the regulators will break the logjam anytime soon. Nonetheless, the fact that the regulators are following through on the promise of the Joint Statement that non-custodial broker-dealers may participate in this new asset class is a welcome development.
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