The U.S. Securities and exchange commission (SEC) continues to make major moves pertaining to the cryptocurrency industry. Of late, the SEC has taken another step towards streamlining the process to settle digital asset securities by shortening four-step processes to three to mitigate operational risks for brokers and dealers.
According to a no-action letter made public on September 25, the SEC has stated that it won’t penalize any broker-dealer that operates an alternative trading system (ATS) that trades digital asset securities if they comply with the new guidelines.
The regulator states that there is demand amidst ATS to follow a streamlined system especially for cases where there is no custody over the trader assets.
Until now, most ATS followed the four-step process where first the buyer and seller send orders to the ATS, then the ATS matches the orders followed by which the ATS notifies both the parties about the matched trade and finally, the transaction is settled bilaterally among the parties or their respective custodians.
However, the Financial Industry Regulatory Authority (FINRA) wants to see more clarity in cases in which the broker-dealer may not take physical custody of the asset.
Some felt that the four-step process is too risky, and hence the ATSs have requested that the process be made more streamlined.
The no-action letter explains that the new process includes:
- Step 1: both the buyer and seller place their orders with the ATS, notify their custodians about their orders, and instruct them to settle the transactions in accordance with the terms of their orders when the order is matched.
- Step 2: The ATS matches the order.
- Step 3: The ATS notifies the buyer, seller, and custodian of the matched order and the custodians carry out the trade-in accordance with the instructions.
According to paragraph (b) of Rule 15c3-3 of the SEC (the Customer Protection Rule), Broker-dealers must “obtain and maintain physical possession or control of all fully paid or excess margin securities carried by a broker-dealer for the account of customers.”
Generally, this rule is a safeguard in case the ATS fails, which protects customers from losses or delays in accessing their security. But things are complicated when this involves digital assets.
The SEC has stated that those using the new model will not face any enforcement action related to the Customer Protection Rule.
Furthermore, the letter adds that those seeking to comply with the new process have addressed concerns regarding their custodial roles and noted that they operate with at least $250,000 in capital, and also inform their customers that the broker-dealer operator cannot guarantee or take responsibility for settling trades.
The broker-dealers must also ensure that they assess security tokens’ registration with the SEC and that the assets comply with federal law.
However, the SEC highlighted that the no-action letter “solely addresses an ATS trading digital asset securities under the circumstances set forth in this letter and does not otherwise address broker-dealer custody or control of digital asset securities.”