The U.S. Securities and Exchange Commission (SEC) has taken an important step in simplifying the settlement of digital asset securities, reducing the previous four-step process into three steps to reduce the operational risk of broker-dealers.
The SEC issued a letter of inaction on September 25 stating that if they comply with the new guidelines, it will not penalize any broker-dealers who use alternative trading systems (ATS) to trade digital asset securities.
According to regulators, some ATSs hope to implement a simplified model without custody of trading assets. Most ATSs follow four steps: first, the buyer and seller send the order to the ATS; second, the ATS matches the order; third, the ATS informs the buyer and seller of the matching transaction; finally, the transaction completes the bilateral transaction through both parties or their custodians.
However, the U.S. Financial Industry Regulatory Agency (FINRA) requires this process to be more clear, in case the broker-dealer cannot physically custody the assets.
Some broker-dealers believe that this four-step model exposes them to too many risks. ATS requirements allow them to simplify the process. According to the letter of inaction, this process will include:
Step 1: The buyer and seller send their respective orders to ATS, notify their respective custodians of the orders submitted to the ATS, and instruct their respective custodians to settle the transaction according to the terms of the order when the ATS notifies the custodian to perform ATS matching ；
Step 2: ATS matches the order;
Step 3: ATS notifies the buyer and seller of the matching transaction and their respective custodians, and the custodian executes the conditional instructions.
According to SEC Section 15c3-3(b) (Customer Protection Rules), a broker-dealer must “obtain and maintain actual possession or possession of all fully paid or excess margin securities held by the broker-dealer for the client’s account. Control.” This rule prevents customers from losing or delaying the acquisition of their securities when the ATS fails. But this becomes difficult when dealing with digital assets.
The SEC stated that broker-dealers who choose the simplified model will not face any enforcement actions related to the Customer Protection Rules. The letter of inaction states that the brokers seeking to implement this process have resolved their concerns about their custodial responsibilities, stating that their working capital is at least $250,000, and they have clearly informed their clients that the broker-dealer operator cannot guarantee or be responsible Settlement transactions. They also explained that they ensure that they have procedures in place to evaluate the registration of security tokens with the SEC and that the assets comply with federal laws.
However, the regulatory agency made it clear that the inaction letter “only addresses the situation where ATS trades digital asset securities under the circumstances specified in this letter, and does not involve broker-dealers’ custody or control of digital asset securities.”
Although this letter expresses the opinions of SEC staff on law enforcement, it is not a legal decision, but it still shows that the supervision of virtual assets is becoming more sophisticated and detailed.
In the past few years, and during Jay Clayton’s tenure as SEC chairman, the SEC has been paying more attention to the supervision of digital assets.
