SEC Redefines ‘Physical Possession’; Wall Street Gets Green Light to Custody Crypto

The SEC Division of Trading and Markets just handed Wall Street the keys, literally. In a staff statement issued December 17, the regulator dismantled the primary barrier preventing major broker-dealers from holding crypto asset securities. The new guidance allows firms to deem themselves in “physical possession” of digital assets if they control the private keys, effectively overwriting the restrictive 2019 framework that forced banks to rely on third-party intermediaries.

The Technical Pivot: Keys Are Possession

For six years, Rule 15c3-3 (the Customer Protection Rule) acted as a moat keeping traditional finance out of direct crypto custody. Regulators previously argued that because digital assets lack physical form, broker-dealers could not prove “physical possession,” forcing them to find a “good control location.” A designation the SEC rarely granted to crypto entities.

Wednesday’s guidance flips this logic. The Division confirmed it will not recommend enforcement action against broker-dealers who custody crypto asset securities if they strictly control the private keys. This is not a free pass; the statement outlines rigid operational hurdles:

• Unilateral Control: No third party (including the customer or affiliates) can have the ability to authorize transfers.
• Disaster Protocols: Firms must have pre-written procedures for blockchain malfunctions, 51% attacks, hard forks, and airdrops.
• Network Vetting: Custody is prohibited if the broker-dealer identifies “material security or operational problems” with the specific blockchain.

Institutional Implications

This effectively opens the custody doors for entities like Goldman Sachs and Morgan Stanley, who have long sought to service digital asset clients without offloading risk to external crypto-native custodians. By bringing custody in-house, these firms can now integrate crypto asset securities into their existing prime brokerage workflows.

SEC Commissioner Hester Peirce acknowledged the shift in a separate response:

“The Statement provides that the Division will not object to a broker-dealer deeming itself to have ‘physical possession’ of a crypto asset security… I would encourage the Division to swiftly develop recommendations for Commission consideration regarding amendments to Rule 15c3-3.”

While the statement legally remains staff guidance rather than a formal rule change, the market effect is identical: the regulatory friction costs for bank-grade custody just dropped to zero.