Summary

SIFMA ¹ and SIFMA AMG ² submitted comments to the SEC Crypto Task Force as they evaluate the appropriate regulatory treatment of wallet providers. This letter addresses the critical question of whether such providers should be required to register as a broker under the Exchange Act of 1934 and comply with the requirements generally applicable to broker-dealers.

Excerpt

It is critical to identify when wallet providers supporting tokenized securities are carrying out services which would require registration as a broker, dealer or other entity. Where wallet providers engage in broker-dealer activities, they raise the same investor protection and market integrity concerns as traditional intermediaries, and regulatory clarity should be achieved through durable, notice-andcomment rulemaking rather than exemptions or no-action relief.

Broker-Dealer Regulation Is Necessary to Protect Investors and Market Integrity

• Applying wallet-based models to tokenized securities without appropriate regulation would expose investors and markets to well-established risks.
• Best execution, suitability, duty of fair dealing, Rule 15c3-5, and other business conduct requirements are necessary to mitigate the risk that wallet providers holding or controlling customer assets route trades based on conflicts of interest or make inappropriate solicitations to customers.
• There is no sound policy basis to exempt wallet providers performing broker-dealer functions from these protections.

Distinguish Non-Custodial Wallet Services from Custody and Safekeeping Models

• True non-custodial wallet services that enable investor self-custody should be distinguished from models in which wallet providers hold or control customer private keys or assets.
• Wallet providers that assume safekeeping responsibilities functionally resemble brokers or custodians and may trigger additional regulatory obligations.
• Clear distinctions are necessary to prevent unregulated custody of tokenized securities and to protect customer assets.

Regulatory Clarity Should Be Achieved Through Rulemaking, Not Exemptive Relief

• SIFMA cautions against exemptions or no-action relief that would allow wallet providers performing broker services to operate outside the broker-dealer regulatory framework.
• Durable, technology-neutral clarity should be achieved through notice-and-comment rulemaking grounded in economic function and the totality of activities performed.
• Clear rules, including those establishing when wallet providers are not serving as brokers, would better support compliant innovation and partnerships between wallet providers and registered broker-dealers.

It is critical to identify when wallet providers supporting tokenized securities are carrying out services which would require registration as a broker, dealer or other entity. Some wallet providers represent their offerings regulatory submissions as simply providing software that enables users to hold their private and public keys. ³ However, there is the potential for wallet providers to offer additional services in which, if they were to be offered for tokenized securities, would function in a manner very similar to, and in some cases would directly overlap with, core brokerage activities, including, order routing, soliciting trades, providing investment advice, arranging financing, and safekeeping. This combination of services beyond basic functions such as key management is seen among some wallet providers supporting the non-security crypto asset markets.

When tokenized securities are involved, these services require registration as a broker, dealer or other entity authorized to perform a relevant function (e.g. regulated national banks which may provide custody services without being broker dealers). Indeed, wallet providers often receive transaction-based compensation from their users. Where securities are involved, this is the tell-tale sign the Commission has historically relied upon to discern whether a party is functioning as a broker by directly or indirectly effecting securities transactions for others.