The American Security and Exchange Commission has shown support to custodial broker-dealers like Coinbase through its SEC clarification letter sent to the Financial Industry Regulatory Authority (FINRA).
SEC is known to be on the neck of crypto firms quarreling over regulation violations and issuing sanctions. However, the case is different now. The regulators sent a letter (SEC clarification letter) to FINRA to clarify what order and under what conditions crypto broker-dealers can swap digital assets.
Broker-dealers are licensed businesses authorized to buy, sell, and trade assets on behalf of their clients. However, in SEC’s letter addressed to Vice President, Risk Oversight & Operational Regulation, Ms. Kris Dailey, FINRA, clarified that broker-dealers like Coinbase could swap between crypto assets on behalf of customers in a three-step process without violating regulations.
Swapping crypto assets without violating regulations
Previously, broker-dealers could not swap crypto assets on behalf of clients. Customers had to submit their trades, wait for an exchange to find a counterparty on behalf of the broker-dealer. After a match for the trade is found, the broker-dealer must confirm again from customers before executing.
The cumbersome process has been simplified. Once customers authorize trade, the broker-dealer custodians execute these trades and inform their customers afterward. The letter clarifies that instead of the previous process, when the customer’s trade order and confirmation are done separately, the process can be completed at once.
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 following the terms of their orders when the ATS notifies the custodians of a match on the ATS.
Step 2 – The ATS matches the orders
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.
The clarification would help broker-dealers become more secure against SEC actions, and customers be more confident when opting for the service.
However, other conditions are attached to broker-dealer executing customer trades, including holding a reserve of $250,000 in net capital.
Reacting to SEC clarification letter
Despite SEC clarification letter attempted, Drew Hinkes, an attorney at US law firm Carlton Fields, said it remains difficult for broker-dealers to establish which cryptocurrencies are legal to trade in the first place.
According to the lawyer, Broker-dealers still do not have definite answers to which cryptos are legal and not.
He also questioned SEC’s Rule 15c3-3. The section requires Broker-dealer to hold physical possession of the customer’s asset.
Mainly, despite SEC’s effort to clarify crypto trades, its letter shows that there are still loopholes at bridging regulation issues with cryptocurrencies in the US.
