The staff of the Securities and Exchange Commission’s (SEC) Division of Trading and Markets has released comprehensive guidance, which addresses how existing federal securities laws apply to cryptocurrency activities.
The newly published document offers a detailed roadmap for broker-dealers, transfer agents, and trading platforms dealing with crypto.
Clarifying custody of digital assets
In 2020, the SEC issued a statement offering a "safe harbor" (protection from enforcement) for brokers who followed specific, strict steps to custody digital assets. That statement is not mandatory. Brokers can still custody crypto securities by following the standard existing rules.
Brokers are allowed to facilitate "in-kind" transactions (swapping the crypto asset for the ETF share). However, if the broker holds the crypto asset itself (like Bitcoin or Ether) on its own books, it must account for the risk.
A warning for investors
SIPC (Securities Investor Protection Corporation) insurance protects customers if a broker goes bankrupt. However, it only covers "securities" that are registered with the SEC. If a crypto asset is an "investment contract" (a type of security) but is unregistered, SIPC will not protect it.
Brokers and customers can agree to treat non-security crypto as "financial assets" under commercial law. This legal distinction can help ensure that if the broker goes bankrupt, these assets are treated as belonging to the customer, rather than becoming part of the broker's general assets to be sold off to pay debts.
Green light for crypto "pairs" trading
The document also addresses the mechanics of trading on Alternative Trading Systems (ATS) and National Securities Exchanges. The Staff confirmed that federal laws do not prohibit "pairs trading (the practice of swapping a crypto security directly for a non-security crypto asset).
