SEC Takes a ‘Big Step Forward’ Regarding Broker-Dealers Trading Digital Asset Securities

In a no-action letter dated Sept. 25 from the US Securities and Exchange Commission (SEC), the agency has released guidance on the settlement of digital asset securities at alternative systems, which “could end up being significant news for exchanges, including DEXs.”

The SEC proposes a “three-step process” for ATS trading that might replace the previous four-step process that FINRA and the SEC instructed broker-dealers to follow. Dating back to the July 2019 statement from the SEC, the letter outlined the factors to be considered to allow ATS operators to facilitate the trade of digital securities.

In the latest process, The broker-dealer custodian can inform the customer about the execution of trades after the fact as such, customers can submit the trade orders and confirmation at the same time, which “doesn’t change much for trading in the industry,” said Brian Farber.

According to the letter, this three-step process would “reduce operational and settlement risk.” Lewis Cohen, founder of blockchain-focused law firm DLxLaw tweeted,

“In the 3-step approach, customers are never exposed to a BD/ATS, so CPR doesn’t apply. It may sound obvious, but still a big step forward.”

Moreover, enforcement action won’t be taken if the broker-dealer operator maintains a minimum of $250,000 in net capital, all applicable securities laws are followed, and an agreement between the broker and their customers states that “broker-dealer operator does not guarantee or otherwise have responsibility for settling the trades.”

This means custodial broker-dealers like Coinbase can legally exchange digital securities without the SEC pursuing enforcement action against them, provided the above-mentioned steps are followed.

According to Farber, it raises new questions such as the undefined term “custodian,” which not every holder uses. The mandate for $250k in net capital would require amending a membership agreement with FINRA. At the same time, the 2019 joint statement clearly prohibits those broker-dealers from custodial functions.

Comptroller Brian Brooks of the Office of the Comptroller of the Currency praised the move.

Drew Hinkes, an attorney at US law firm Carlton Fields also tweeted that the big picture is “It got easier to trade digital asset securities. BDs have certainty as to how to trade digital asset securities (and) Custodians are even MORE important.”

But still, there is no clear way to determine which cryptos are security and legal to trade. As such, more clarity and guidance is needed from the SEC.

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Author: AnTy

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