Why Self-Custody Wallet Platforms Are Not Brokers Under the Securities Exchange Act of 1934
ABSTRACT
Self-custody wallet platforms (“SCWPs”) serve as a gateway for users
to send, receive, and access digital assets. On top of these basic features,
many SCWPs enable users to exchange digital assets, connect to
Decentralized Finance (“DeFi”) protocols, and convert digital assets to fiat
money. Unlike custodial wallet platforms, users are responsible for securely
storing their private keys and third parties may not act on the behalf of the
user without their approval. None of the more than 55 existing SCWPs are
registered as a broker under the Securities Exchange Act of 1934
(“Exchange Act”) and none have complied with any of the Exchange Act’s
disclosure requirements.
This Note will address these concerns and conclude that SCWPs are not
unregistered brokers because the receipt of transaction-based fees by
connecting buyers or sellers to a decentralized exchange (“DEX”) without
transferring custody through a SCWP is not, by itself, sufficient to designate
a SCWP as a broker, but rather fits within a “finder’s exemption.” Existing
justifications of broker regulation under the Exchange Act do not apply with
equal force to SCWPs. Thus, Congress should legislate new authority to an
agency with greater expertise – the Department of Treasury – to oversee the
technological, financial, and national security risks of SCWPs.