Regulating Digital Asset Wallets: Protecting Investors in Tokenized Markets

So, Peter, I’m going to start with you. SIFMA has written several letters to the SEC’s Crypto Task Force on digital asset wallets. These include a December 2025 letter on tokenized security markets broadly, the January 2026 letter on wallet providers and broker dealer regulation, and the February 2026 follow-up letter specifically on non-custodial wallet providers. SIFMA also submitted a response in June of this year to the SEC’s Trading and Markets Division on their staff statement providing limited exemptions for certain types of wallet providers from broker dealer registration requirements. Before we get into the substance of these letters, maybe you can explain what exactly is a digital asset wallet and why is it important and how this fits into SIFMA’s broader work around digital assets more generally.

Peter Ryan: Well, thanks, Ken. Let me start with the basics and then explain some in that broader context. And it’s simplest a digital asset wallet is a tool, typically an app, though sometimes a dedicated hardware device that holds the cryptographic keys controlling a blockchain address. Those keys allow you to do really anything on-chain, that is, hold a token, send or receive it, or sign a transaction to buy or sell a digital asset. The assets themselves live on the ledger, not on the wallet. But the wallet isn’t an asset, and at least in its non-custodial form, it isn’t an account in the traditional sense either. It can be better thought of as an access point for transacting on a blockchain. Wallets are important because they are going to be one of the primary ways that investors will access tokenized securities and other on-chain assets. As the market for tokenized assets grows, and all projections, including CIPA projections, suggested will grow substantially over the coming years, wallets will become increasingly important in those markets, much as brokerage platforms are for the equity markets today. So the question of how wallet providers are going to be regulated is really quite central to the development of tokenized securities and digital asset markets more generally. There are a lot of nuances here, and I know Charles and Michael will go into some of those momentarily. But fundamentally, this is a question about wallet providers and how they should be regulated. Should they be regulated as brokers and subject to the same sorts of investor protections that existing broker dealer regulation provides, such as requirements around best execution and conflicts of interest, or whether they should be regulated differently, either via a new separate framework or even be completely exempt from the types of requirements that brokerage front ends are subject to today? From a similar perspective, we’ve been clear in all of our letters that first and foremost, investors in these markets must be protected. There’s a good reason the brokers interacting with the public is subject to strict rules designed to protect investors. And it’s critical that entities that perform functionally equivalent roles in tokenized securities markets, including activities such as the custody of an investor securities, the routing of borders, creation of venues, market makers and prices, or the provision of investment advice be subject to similar rules to ensure the protect investors are protected from harm and manipulation. And that’s particularly true when those entities are also earning compensation tied to those activities, which exacerbates the potential for conflicts of interest. So when wallet providers are performing these types of functions, it’s our view that they should be subject to long-standing broker dealer regulatory frameworks. By contrast, where they’re merely acting as disinterested technology tools that allow an investor to direct their own trading activity and self-custody their own assets, then there is a stronger case for exempting wallets from the application of certain broker dealer rules. And where a wallet provider is performing some but not all of these core broker functions, then there may be a case for applying an alternative regulatory framework. But throughout all of this, the key question for the SEC and for other regulators should be what functions and activities are being performed, not what technology is being used or labeled as being applied to those activities. In other words, as we’ve said throughout our letters, there needs to be a same risk, same activity, same regulatory outcome approach to regulating novel technologies and operating models, including wallets and wallet providers.

Bentsen: So, Micah, our letters identify really four distinct types of wallets: a basic self-custody wallet, a self-custody wallet that adds other services, a basic custodial wallet, and a custodial wallet that adds other services. Can you walk us through that taxonomy and what separates one from the next and why does where a wallet falls on the spectrum end up driving regulatory analysis?

Micah Smith: Yeah, thanks, Ken. So I think this taxonomy is really a helpful way into the entire conversation here, because it shows how the term wallet is really a spectrum rather than any single type of thing. And if you want to find out where a wallet falls along the spectrums, there’s really two questions I’d ask. The first is does this wallet take custody? Meaning, does it hold and controls the customer’s keys and assets, or does the customer alone control them? Now the second question is whether the wallet provider provides only maybe what we can call basic functionality, or if it layers additional services on top of that. So if we start with the two self-custody models, in the basic case, the customer holds their own keys, and the software simply allows them to store those keys and sign their own transactions. And that’s really the pure technology case, and the analysis there is relatively straightforward. Now, the second type is this self-custody wallet with what we’ll call additional services. So the customer still holds the keys, it remains non-custodial, but the provider begins to layer on functions such as routing of orders, curation of venues, or surfacing of quotes. Now, this is really important because it demonstrates that a wallet can be entirely non-custodial and still be performing activities that resemble those of a broker. Now, the other two models, if you pointed out, are custodial. And in their basic custodial case, the provider pulls the keys and assets, so it’s taken on some sort of safekeeping role. And even without any additional trading services, that custody function alone carries its own obligations. You know, the party is now responsible for protecting the customer’s property and ensuring its return. And of course, that custodial wallet can then add those additional services, so both holding the customer’s assets and layering trading functions on top. So, to really answer your question on why the wallet’s production position on that spectrum should drive the regulatory analysis, it’s really because our approach here at SIFMA is functional. The regulatory obligations that should be attached depend on what the wallet provider is actually doing. and those two dimensions, both custody and added services, are really a way of asking which function a provider has taken on.

Bentsen: So Charles, you know, maybe following on you know both Peter’s introduction and then what Micah was just talking about, um, you know, one of our overriding themes has been, you know, across all of our digital asset work is you know, regulate the function, not the technology. What does that mean in practice?

Charles DeSimone: Yeah, it’s a great framing, and one which we’ve consistently recommended as we work to bring on-chain operating models within the securities regulatory framework. And our approach is really grounded in the principle that like activities should be regulated alike. So looking at the context of wallet providers, let’s compare two examples. First, the case of a retail investor who uses an equity trading application to route an order to a national securities exchange, regardless of whether they choose the exchange themselves or rely on the broker dealer to achieve best execution, and then matches against another retail investor via the exchange’s order book, and compare that with a retail investor who uses a wallet application that routes the user’s tokenized security order to a decentralized exchange, once again, regardless of whether they choose the specific DEX promoted by the wallet provider, rely on the wallet software to automatically route, and then the transaction is executed using an automated market maker. While the different trading venues and protocols involved in those two cases, from the investor perspective, the equity trading application and the wallet application are performing very similar order routing functions and create very similar investor protection concerns. As we look beyond that specific order routing workflow to the broader experience of a user working with a wallet provider, we see even more areas where it can be argued that the wallet provider can be providing services which have been traditionally associated with a broker. For example, there are a range of on-chain venues where trades can be executed. If the wallet provider curates a list of recommended venues and provides a ranking of them according to some metric, are they effectively providing routing guidance or just providing transparency into a complex technological environment?

Bentsen: So you know, are are are these so you know the the issues you just raised, are these signals that tell you that a wallet provider has crossed the line from being just a technology tool to actually performing broker dealer activities? And are there other things in isolation that are indic indicative? And and and then you know, how should we think about this process, understand this process in the context of prior market developments, guidance and court cases?

DeSimone: Yeah, it’s a great question, and definitely one where it’s necessary to really think about this in a structured way to make sure we’re approaching this question the right way. And as Micah previously outlined, wallets that facilitate the holding and transfer of securities exist on a continuum of functionality, and individual wallet providers offer varying levels of features and services. This makes it particularly critical to clarify the outer boundary of the wallet versus broker delineation. In other words, the point at which wallet activity crosses into broker dealer territory requiring registration. We appreciate that the SEC does not point to a single activity to determine broker dealer’s status, but instead looks primarily to the aggregation of certain activities within a single provider, which should raise heightened concerns and consideration for registration. Some of the most important ones include monetization of order flow, use of non-transparent or conflicted routing, affiliation with execution venues, front running of customer orders, claims around offering best execution type services, and importantly, transaction-based compensation. Although transaction-based compensation has long been hailed by the Commission as indicative of broker status, we should not fall into the trap of treating it as a simple test in isolation from other factors. Taken together, looking at a user trading interface that provides connectivity to trading venues, exercises discretion over which venues to display, prepares and in some cases actually routes instructions for transactions and securities, handles customer orders, and receives transaction-based compensation, could under existing precedent be considered to be engaging in broker dealer activity. Looking beyond just order routing and trade execution, we see wallet providers in digital markets offering additional services which will be regulated in a securities context, such as arranging financing for users’ assets, soliciting customers to purchase and sell assets, and providing recommendations or other investment advice. Wallet providers that connect customers to lending protocols are effectively offering financing providers and allowing customers to invest on a leveraged basis, which is a core arranged financing, an activity for which regulated broker dealers are subject to regulation and oversight. It’s important to take a broad and holistic view of the wallet provider’s activities vis-a-vis the client when determining whether they have broker status and avoid overly determined and narrow approaches. Looking back at how this issue has been approached over decades, it has been consistent that determining broker status is a highly fact-specific inquiry that requires evaluation of the multiple indica of broker activity, which are then viewed in the aggregate. In this light, we would caution against relying on a single court case, such as the recent SEC V Coinbase case, is a clear resolution of these questions. While that case touched on the question of broker status, it does not resolve the complex questions surrounding the distinction between technology and broker dealer activities. Determining broker status needs to be informed by an aggregate of statute regulations, judicial precedent, commission releases, staff interpretations, and the consistent policy goals that underlie them, rather than a sim simplistic reliance on any individual fact-specific decision.

Bentsen: So you know, you sort of answered my next question, which was gonna be, you know, so why should we care if some of these wallets that are providing broker-like functions are not registered? You know, is that just regulatory relief? And I think you walked through all of the different investor protection rules that apply to traditional brokerage activities, you know, things like you know, best execution, front running, access to the tape, et cetera. Those are pretty material, but I want to turn from that, because I think you underscored that well. I mean, if somebody or in an organized brokerage activity doing the same thing, it the investor should have the same protections. But Mike, I want to turn to you for a second. Some wallet providers argue that they’re simply offering disinterested technology solutions, neutral software that don’t involve humans, that, you know, and therefore shouldn’t be regulated like brokers, the fact that there are no humans involved, there there can’t possibly be any conflicts. And you know, how how does SIFMA respond to that?

Smith: Yeah, it can certainly. So, as you say, that’s one of the arguments we hear most frequently, and and we’ve certainly thought about it quite a bit. And and we believe that there are wallet providers that are genuinely pure technology. You know, if all the wallet does is allow you to store your own keys, sign your own transactions, then then kind of the mental model I use here is that it’s the digital equivalent of a safe that maybe sits in the closet and holds paper certificates. You know, it’s simply a tool that provides access. So in those cases, it doesn’t need to be regulated like a broker. And we’ve been consistent on that point across all of our letters. We’re not seeking to sweep in true self-custody software or to regulate a firm that’s simply providing technology to maybe a registered broker dealer who stands behind that underlying activity. So those chases, those cases have genuine merit and clear rules should provide room for them. Where that argument falls short is when neutral software is used as a label that the facts just don’t support. So as Charles and I discussed earlier, many of these applications go well beyond holding keys, doing things like routing, displaying prices. There’s a related argument too, I might caution against the bit here, which is you know, you can argue that by disaggregating these functions across separate components and characterizing each of those pieces as merely neutral technology kind of gets you around some of this. And we see that in the DeFi space with DEX aggregators providing some of the routing components, whereas the wallets just interact with those DEX aggregators. But more holistically, dividing a broker-like function into different parts, it doesn’t make the regulatory responsibility disappear. The correct analysis here looks at the combined effect on the investor. So when you talk about like claims of neutrality, we think that those should be taken seriously, but then tested against what the software actually does. You know, software is disinterested when it’s in fact disinterested, meaning it’s not exercising any discretion over those types of transactions.

Bentsen: Well, and an issue that’s come up is whether or not a non-custodial wallet is holding a key or assets or not. And if not, it shouldn’t, you know, some have suggested, well, it can’t be a broker, but but why is control of a the private key significant in the custody question, but not necessarily the right test for broker status?

Smith: Right. So I think this ultimately comes down to two distinct questions that are oftentimes collapsed into one. So we’ve discussed this question of custody, and obviously if a wallet provider holds the customer’s keys, it’s assumed the safekeeping role. But I think the difficulty here arises when that answer is imported into an entirely different question, namely whether the provider is a broker or not. And so the argument we hear is that because a wallet is non-custodial, you know, because it never holds the customer’s keys or assets, it can’t be a broker. But that really doesn’t follow. So broker status is never termed on whether a firm holds customer assets. In the equity markets, there are many registered executing brokers that never hold customer property at all. And retail trading applications route customer orders without ever holding the customer shares. Yet no one questions whether they have to register. They they certainly do. So what makes an entity a broker is that it’s affecting transactions and securities for others, meaning routing the order, handling it, participating in that process, unot whether it holds the assets while it’s doing so. So I think our point here is more about keeping those two questions separate. The absence of custody is a great answer to the custody question, but it’s not an answer to the broker question. And you know, if you were to use non-custodial here as a term, as a shield against broker registration, it’s really conflating two things the law has always treated as distinct.

Bentsen: Yeah, well, yeah, I mean, to your point, I mean we have thousands of registered broker dealers who are introducing brokers and have you know the direct contact with the client, but they don’t ever custody the assets. The other thing, you know, we’ve spent a lot of time thinking about and commenting on tokenized securities. So tokenized traditional assets, not crypto generally or native digital assets is some use as a term of art. You know, and and that’s a growing area. I think there’s something like in the US, maybe anywhere between $25 and $30 billion of tokenized traditional securities, mostly in the treasury space. Again, the equity space, it’s still rather nascent around in our data, around maybe a billion, a billion plus. But certainly something that’s getting a lot of focus. The questions come up is you know, when you have a wallet and it’s being used to hold or trade tokenized stock, a tokenized equity versus a token,  a non-security crypto asset. You know, what are we thinking about the differences there and what protections attach once the asset is a traditional security, if you will, registered security versus a non-registered native digital asset?

Smith: Yeah, and I’m really glad you asked that, Ken, because it’s such an important point of scope here and one that I think can be lost in the debate. So everything we’ve been talking about here today has been directed specifically at tokenized security. You know, it’s not a general claim about crypto. So if we think about a wallet as they’re you know used today, as they were used at the very beginning of their creation, you know, many of these functions, such as routing, venue curation, you know, they are completely fine to be working within a wallet. They, you know, if they’re within a non-securities market, they largely fall outside of the SEC’s jurisdiction. And to be clear here, we’re not asking the commission to extend its reach to regulate a few of those activities. And I think you hit this exactly right in the question. What changes the analysis is the nature of the asset. So the moment the instrument in that wallet becomes a tokenized security, maybe a tokenized equity, for example, then securities laws apply. A tokenized share of stock remains a share of stock. Placing it on a blockchain doesn’t change what it is,  nor does it remove the protections that Congress attached to it. And you know, this SEC staff have repeatedly stated this that tokenized securities remain securities, and that federal securities laws apply to them to the same extent as their traditional counterparties. So it’s really this question of definition. Once the assets of security, the full investor protection framework that Charles described a few minutes ago comes into effect. And we’re cautious to what other entity is facilitating those functions. Well, we think that’s why we’re cautious about business models that existed in native crypto markets. But you can’t simply transplant that model into security markets as though the character of the ex asset, sorry, the character of the asset was in material. When the asset’s a security, the activity surrounds it, securities activities, and those associated investor protections have to travel with it.

Bentsen: Yeah, that goes back to the whole question of looking at the function, not the technology per se. Charles, I want to turn quickly to the most recent letter we filed. And in April, the Securities Exchange Commission’s Division of Trading and Markets issued a staff statement creating a limited pathway for certain wallet providers. Can you explain what the staff statement actually did? You know, what is this idea of a quote-unquote covered user interface? And what relief does it offer for non-custodial wallets that assist user-initiated transactions? You know, why does the FCC see that as such a significant departure from the historical reading of the broker definition?

DeSimone: It’s a great question. So at a high level, the staff statement created a pathway for wallet providers to support transactions and tokenized securities as covered user interfaces or CUIs without requiring them to register as brokers. Notably, the statement outlined a number of restrictions which wallet providers would need to meet in order to qualify for the framework. Perhaps most importantly, it’s restricted to non-custodial wallet providers. The provider interface cannot have access to or control of your private keys. It also constrains how the wallet can interact with clients and facilitate their orders. All transactions must be user initiated, and the wallet cannot solicit investors to make any particular transaction or offer investment advice. The wallet can display one or more trading venues, but it needs to disclose any affiliation to them, and it cannot offer any guidance or recommendation on which venue is the best. Although, as we discussed before, curating venues and providing filtering tools has many similarities to making implicit recommendations. Nor can the wallet provide supporting services, such as arranging financing or making asset valuations. However, the wallet provider can receive transaction-based compensation, which as we previously discussed, has long been viewed as a hallmark of broker activity, even if it is not the only factor. The relief provided by the statement is temporary, lasting five years, but it came into effect upon release. So this is an important announcement shaping how the tokenized securities market can develop. While commission no action letters and enforcement actions have shaded the boundaries of broker status, historically it has not been the prevailing view of the commissioner practitioners in the market that a user interface for trading securities, which can effectively include connecting to execution venues, exercising discretion regarding which venues to display, preparing transactions instructions, and handling orders while receiving transaction-based compensation could be operated outside of a regulated registered broker dealer regime or without the involvement of a broker dealer elsewhere in the order execution workflow. While we appreciate that the staff statement does seek to circumscribe the scope of permissible activities for CUIs, it nonetheless represents a notable shift. Permitting a shift only for digital asset securities also appears to contrast with the SEC’s longstanding technology neutral approach to regulation. In particular, we believe additional guidance is needed to identify when the combination of services offered by a CUI enters broker dealer territory and would need to be performed by or in conjunction with a regulated entity. While in the past, the SEC has issued no action letters exempting certain entities from broker registration. The operating models in those cases typically retained a regulated entity or intermediary with investor protection obligations somewhere within the order execution workflow, which is missing in the CUI framework created by the staff statement. SIGMA supports the Commission’s work to integrate new technologies and operating models into the securities regulatory framework. But we think the SEC needs to explore ways to provide a more structured integration of CUIs and wallet provider services into established regulatory frameworks through formal rulemaking, and do so in a way which provides a pathway for the adoption of wallets and related technologies by the industry broadly.

Bentsen: Yeah, and and Peter, let me ask you, I mean, that I mean this last point that Charles raised about you know formal rulemaking, why why is that so important? I mean, it’s it’s very important for the commission and regulators more generally to give regulatory clarity, particularly when you’re talking about new products, new technology, whatever it may be. But you know, why is why is notice and comment so important here?

Ryan: Well, kind of and that’s because markets need durability and certainty of rules. And that’s what ad hoc exemptive relief really can’t give you. A staff statement or a no action letter, even a commission-level exemptive order isn’t a rule. It can be narrowed, modified, or withdrawn at any time. It also doesn’t carry the same legal weight. And that can all happen without a public process and without input from a broad range of market participants. As Charles mentioned, the April staff statement comes with a five-year sunset provision written into it, but it also could theoretically be withdrawn even sooner by the staff of a future SEC. It is very difficult for firms to stand up, for example, a real compliance program or for registered broker dealers to build a partnership with a wallet provider on the basis of something that may not be there in a few years, impermanence and ambiguity of what actually chill responsible innovation. It produces durable rules with the force of law built on a full public record where everyone that is affected, not just a handful of firms seeking relief, get to weigh in. And it is better equipped than ad hoc exemptions for the types of holistic market-wide changes that Charles and Mike have been discussing. For example, such as changes to the definition of what a broker actually is, helping, therefore, to prevent gaps that create the opportunity for regulatory arbitrage and potential harm to investors and market integrity. So the key point here really is that clear rules of the road will actually facilitate, not hinder the development of wallet infrastructure and by extension tokenized securities markets themselves. And those clear rules will provide a stable framework that will allow wallet providers to build out their products and provide confidence to regulated firms to partner with them to provide on-chain services to their client base. So again, durable rules aren’t a break on market development. They’re really the foundation for the long-term success of tokenized securities market.

Bentsen: And Peter, you know, beyond the issue of wallet providers, and this has been a great discussion today, but beyond the issue of wallet providers, what are some of the other key areas that you expect the SEC and other regulators like the CFTC banking regulators to address over the coming months? And what’s the work that SIFMA is doing in this space?

Ryan: Sure, there is a lot going on. And as you know, wallets are one piece of a much bigger regulatory modernization agenda, and the next several months are going to be busy on a number of fronts. On the SEC side, we expect the agency to provide additional clarity around how tokenize securities are issued, trade, settled, and custodies. In the near term, we expect the SEC to issue an innovation exemption for certain types of on-chain securities activities. And our position there has been consistent with everything we’ve said today. To the extent the Commission uses exemptive relief to let new models develop, that relief should be narrow, conditioned, and time-bound, not a board-based categorical exemption from statutory definitions such as the long-standing definitions of a broker dealer exchange or other regulated intermediary. It’s also critical that those protections be preserved so that investors continue to be protected and market integrity being maintained. We also expect the SEC to engage in rulemaking to clarify how non-security crypto assets are going to be treated for capital raising and other purposes, as well as for to clarify how broker dealers can cut devote tokenized securities and non-security digital assets. The SEC is also likely to issue some proposed rules to update how transfer agents operating in tokenized securities markets are regulated. In parallel, there’s a lot of regulatory work happening to develop digital cash markets. In particular, there’s a lot of activity around the implementation of the Genius Act, with a wave of ongoing proposed rulemakings from the OCC and other banking agencies on payment stable coins. And as payment stable coins and tokenized deposits move into the capital markets as a settlement tool, getting that framework right is going to matter enormously for the securities industry, not just for the banking world. And we’ve been engaged with the Genius Act implementing agencies on those issues. Again, those issues that have a real capital markets nexus. And then there are a range of other regulatory and policy questions that have to be resolved, including the permissibility of banks to engage with the broad range of digital assets and the capital treatment of banks’ exposure to payment stablecoins and non-security crypto assets. And of course, Congress is currently considering digital asset market structure legislation, which would have significant ramifications for the entire digital asset marketplace. This movement and its members have been engaging across the board on all of these issues, working via our common letters and other initiatives to provide constructive input and feedback to the administration, regulatory agencies, and Congress as they engage in this process of regulatory modernization to support innovation and new technologies. But throughout all of our submissions and all of our feedback, our view has been remained very much consistent. We are supportive of innovation and the development of tokenized asset markets. And we think the way you’re actually going to achieve that is by building on the investor protection and market integrity framework that has made the US markets the strongest, deepest, and most vibrant in the world.

Bentsen: Well, Peter, Charles, Micah, thank you. Really great conversation, very informative. And so thank you for taking the time. And also want to thank all of our listeners for tuning in to the Sitma podcast. To learn more about Sitma and our work to promote effective and resilient markets, please visit www.sitma.org. And again, thank you all.