The U.S. SEC issued a no-action letter, taking an important step in digital asset settlement

The U.S. Securities and Exchange Commission (SEC) has taken a major step toward streamlining the settlement of digital asset securities, compressing the previous four-step process into three steps to reduce operational risk for broker-dealers.

The SEC issued a no-action letter on Sept. 25, stating that it will not penalize any broker-dealers that use alternative trading systems (ATS) to trade digital asset securities if they comply with new guidelines.
According to the regulator, some ATSs want to operate a simplified model without custody of traded assets. Most ATSs follow four steps: first, buyers and sellers send orders to the ATS; second, the ATS matches the orders; third, the ATS notifies buyers and sellers about the matched trades; and finally, the trade is completed bilaterally through the two parties or their custodians.
However, the U.S. Financial Industry Regulatory Authority (FINRA) has called for greater clarity on the process in case broker-dealers are unable to take physical custody of the assets.
Some broker-dealers believe the four-step model exposes them to too much risk. The ATS requirement allows them to streamline the process. According to the no-action letter, the process will include:
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 the transaction in accordance with the terms of their orders when the ATS notifies the custodian for ATS matching;
Step 2: ATS matches the order;
Step 3: The ATS notifies the buyer and seller and their respective custodians of the matched trade, and the custodian executes the conditional instructions.
Under SEC Rule 15c3-3(b), the Customer Protection Rule, broker-dealers must “obtain and maintain physical possession or control of all fully paid or excess margin securities held by the broker-dealer for customer accounts.” The rule protects customers from loss or delay in accessing their securities in the event of an ATS failure. This becomes difficult when dealing with digital assets.
The SEC said broker-dealers that choose the simplified model will not face any enforcement action related to the Customer Protection Rule. The no-action letter states that brokers seeking to implement this process have addressed concerns about their custodial responsibilities, stating that they have operating capital of at least $250,000 and that they clearly inform customers that broker-dealer operators cannot guarantee or be responsible for settling trades. They also explained that they ensured that they have procedures to evaluate security tokens for registration with the SEC and that the assets comply with federal law.
However, the regulator clarified that the no-action letter “addresses only the ATS’s trading of digital asset securities under the circumstances set forth in this letter and does not address the broker-dealer’s custody or control of digital asset securities.”
While the letter expresses SEC staff’s opinion on enforcement, it is not a legal decision, but it still shows that regulation of virtual assets is becoming more sophisticated and nuanced.
Over the past few years, and during Jay Clayton's tenure as SEC Chairman, the SEC has been paying more attention to the regulation of digital assets. (Cointelegraph Chinese)