SEC Guidance on Cryptocurrency Operations
The Securities and Exchange Commission (SEC), via its Division of Trading and Markets, has unveiled a new guidance document that clarifies how federal securities regulations relate to cryptocurrency operations. This extensive guide serves as a navigation tool for brokers, trading platforms, and transfer agents engaged in the cryptocurrency sector.
Safe Harbor Provision
In 2020, the SEC had previously mentioned a “safe harbor” provision to shield certain brokers from regulatory action, given they met specific criteria for handling digital assets. It is important to note that adherence to this safe harbor is optional; brokers have the choice to manage cryptocurrency securities under traditional regulations instead.
In-Kind Transactions and Risk Management
The guidance also permits brokers to engage in what are known as “in-kind” transactions, where they can exchange cryptocurrencies directly for shares of exchange-traded funds (ETFs). Should a broker decide to hold crypto assets such as Bitcoin or Ether on their balance sheets, they will need to account for any associated risks involved with those holdings.
Customer Protections
Customers’ investments also carry some protections. The Securities Investor Protection Corporation (SIPC) provides a safety net for clients in the event of broker bankruptcy; however, this protection is limited to “securities” that are officially registered with the SEC. If a cryptocurrency is categorized as an “investment contract”—a type of security—but is not registered, any SIPC coverage would not extend to it.
Classification of Non-Security Cryptocurrencies
An alternative path for brokers and clients is to classify non-security cryptocurrencies as “financial assets”, operating under commercial law. This classification has significant implications; in bankruptcy scenarios, these assets may be deemed as belonging to the client rather than being sold off among the broker’s other assets to settle debts.
Trading Processes and Regulations
Additionally, the SEC’s guidance explores the trading processes on Alternative Trading Systems (ATS) and National Securities Exchanges, clarifying that federal regulations do not prevent the practice of “pairs trading,” where a crypto security is exchanged for a non-security cryptocurrency asset directly.
