SEC Regulatory New Trends: Lowering Custody Thresholds for Crypto Assets, Major Changes in Broker-Dealer Mechanism Design

The U.S. Securities and Exchange Commission (SEC) updated its Frequently Asked Questions (FAQ) guide on crypto asset activities on December 17, 2025. This document sends an important signal—the definition of “control” over private keys by traditional brokers has become more flexible.

According to the latest FAQ details, SEC staff clarified how some large investment banks and brokerage firms can legally manage clients’ digital assets while complying with securities custody requirements. This is closely related to how they handle ETF products related to crypto assets (such as Bitcoin and Ethereum ETFs).

Redefining Key Rules: From Strict Custody to Flexible “Control”

The core change in the new guidelines involves a reinterpretation of Rule 15c3-3 of the SEC. Under the previous logic, broker-dealers had to directly hold or control clients’ crypto assets in specific ways. Now, the guidance allows for more flexibility.

For non-securities crypto assets (like Bitcoin you hold directly), Rule 15c3-3(b) no longer applies, meaning these assets are no longer covered under traditional customer protection mechanisms. For securities-related crypto products, broker-dealers can now demonstrate control through various “qualified control locations”—not necessarily the most stringent form.

What does this mean? Broker-dealers are no longer forced to follow the narrow path of “professional custodians” but can instead meet regulatory requirements through bank custody, multi-signature agreements, or other arrangements.

From Key Management to Permission Design: New Compliance Approaches

Under the new rules, the key question is no longer “who holds the private keys,” but rather “who has the authority to move assets.” This is a subtle but important distinction.

Several feasible architectures are emerging:

First: Broker-Dealer Self-Holding Keys
The broker-dealer manages keys stored in hardware security modules (HSMs) or multi-signature wallets directly. The advantage is the most straightforward proof of control and easier auditability. The downside is the need to build secure infrastructure, facing network risks and scalability costs.

Second: Bank Custody + Instruction Authority
The broker-dealer deposits assets in a qualified bank custody location but retains the authority to instruct asset transfers. This approach is more friendly to traditional institutions, as they already have mature processes for bank cooperation. Risks include the need for clear contractual terms and sufficient audit trail in case of disputes.

Third: Hybrid Crypto Custody
Utilize specialized crypto custody service providers, layered with bank or trust structures to enhance compliance credibility. This approach is fast and suitable for quickly launching tokenized securities but requires ensuring control locations always meet standards.

Quiet Improvements in Capital Efficiency

Another often-overlooked benefit of the new regulations is their impact on capital requirements.

Suppose a broker-dealer maintains an average daily inventory of $50 million in Bitcoin or Ethereum to support spot creation and redemption activities. Under the new rules, such positions can be considered “immediately tradable,” applying a 20% commodity discount factor. This means the firm needs to set aside approximately $10 million in net capital as a buffer for this inventory.

In contrast, without this discount or with stricter handling, capital requirements would be higher, directly affecting the feasibility of supporting spot creation and redemption markets.

Relaxed Central Bank Oversight and Market Cooperation

The Federal Reserve withdrew a previous supervisory letter on April 24, 2025, which had set prior notification thresholds for certain crypto assets and stablecoins. This withdrawal means banks no longer need to report crypto custody activities in advance to the central bank, instead handling them through regular supervisory channels.

What does this imply for broker-dealers? Cooperation with banks may become smoother. The previous process of “idea to discussion with bank regulators” might have involved extensive pre-approval; now, this process could be shortened.

However, broker-dealers still need to demonstrate effective control over assets and maintain complete audit records for regulatory verification.

Roadmap for the Next 12-18 Months

Market is forming several mainstream paths, each with trade-offs:

• Self-Custody vs. Bank Custody: Self-custody provides a complete proof chain but increases operational and security burdens; bank custody is easier but relies on contractual and third-party cooperation.
• Lack of Standardized Checklists: Currently, there is no unified “on-chain control proof” checklist, meaning each regulatory inspection may face different standards.
• Differentiation of Compliance Costs: Costs for crypto custody may diverge—high-frequency spot creation and redemption institutions will need to invest more, while those not involved in this area may be less affected.

The SEC’s guidance relaxes some constraints but also seeks to draw clear bottom lines. For retail-facing broker-dealers, a clear red line remains: Non-securities crypto assets are still not protected under Rule 15c3-3(b). This means you need to clearly understand which assets the broker-dealer commits to protect and which are outside the scope of protection.

Overall, this SEC update aims to pave the way for traditional financial institutions to enter the crypto custody space, while also demanding market participants demonstrate compliance through clearer, verifiable methods. The key questions ahead are: Will these FAQs be further revised? And will FINRA introduce more standardized on-chain control proof guidelines?