SEC issues no-action letter in response to digital asset securities questions

A September 25 letter from the Securities and Exchange Commission (SEC) has cleared the way for additional means of using alternative trading systems to facilitate the trade of digital asset securities.

The no-action letter, drafted by the SEC’s Division of Markets and Trading and addressed to FINRA vice president of risk oversight and operational regulation Kris Dailey, focuses on a specific approach to handling trades on an ATS, namely a so-called “Three-Step Approach” that some broker-dealers have sought permission to use.

The letter’s origins trace back to a July 8, 2019 statement from the SEC, during which the Division — alongside FINRA — outlined the factors by which it would consider allowing ATS operators to facilitate the trade of digital securities. Digital securities in this context refer to securities that are held and exchanged via a distributed ledger system.

Friday’s no-action letter described a four-step process by which an ATS would facilitate a trade: “Step 1 – the buyer and seller send their respective orders to the ATS; Step 2 – the ATS matches the orders; Step 3 – the ATS notifies the buyer and seller of the matched trade; and Step 4 – the buyer and seller settle the transaction bilaterally, either directly with each other or by instructing their respective custodians to settle the transaction on their behalf.”

Yet “several broker-dealers seeking to operate an ATS that trades digital asset securities have asserted that the four-step process described above increases operational and settlement risks,” according to the letter, and instead pressed the SEC on whether they could take an alternative approach, as outlined below:

“Step 1 – the buyer and seller send their respective orders to the ATS, notify their respective custodians of their respective orders submitted to the ATS, and instruct their respective custodians to settle transactions in accordance with the terms of their orders when the ATS notifies the custodians of a match on the ATS; Step 2 – the ATS matches the orders; and Step 3 – the ATS notifies the buyer and seller and their respective custodians of the matched trade and the custodians carry out the conditional instructions.”

“Broker-dealers seeking to operate an ATS assert that the primary benefit of the three-step settlement process is that it would reduce operational and settlement risk,” the letter added.

Ultimately, the SEC said that it would not pursue enforcement in this case, provided that the “[t]he broker-dealer operator maintains a minimum of $250,000 in net capital,” that the agreements between the broker-dealers and their customers “clearly state that the broker-dealer operator does not guarantee or otherwise have responsibility for settling the trades,” that efforts are taken to establish that such securities are properly registered or exempted, and that all applicable securities laws are followed.

A day after the letter’s release, Comptroller Brian Brooks of the U.S. Office of the Comptroller of the Currency hailed the move, writing on Twitter:

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