Monday, November 23, 2020
Home Decrypt News The SEC Just Reduced Risk For Broker-Dealers Like Coinbase

The SEC Just Reduced Risk For Broker-Dealers Like Coinbase

In brief

  • A letter from the SEC to FINRA has clarified in what order and under what conditions crypto broker-dealers can swap digital assets.
  • The note helps make it easier and less risky for businesses like Coinbase to deal with crypto swaps.
  • There are still many unanswered questions for a complete crypto regulatory framework.

The US Securities and Exchange Commission has clarified how custodial broker-dealers like Coinbase can legally exchange digital securities on crypto exchanges without the SEC “recommend[ing] enforcement action” against them.

Broker-dealers are licensed financial businesses in the US that are authorized to hold, buy, sell, and trade assets on behalf of their customers. The ruling should make it easier and less risky for broker-dealers to trade digital assets on behalf of their customers.

The SEC’s letter, signed on Friday and addressed to a VP at the Financial Industry Regulatory Authority (FINRA), clarifies that broker-dealers like Coinbase can swap between crypto assets on behalf of customers in a three-step process: 

First, customers authorize trades with specific conditions like price and amount beforehand, Then the broker-dealer custodian executes these trades. Finally, they inform the customer after the fact.

Under previous SEC guidance, laid out in a Joint Staff Statement in July 2019, customers would submit their trades, then wait for an exchange to find a counterparty on behalf of the broker-dealer. Once the exchange found a match for the trade, the broker-dealer custodians would again have to request confirmation from customers before executing the final transaction. 

Essentially, Friday’s SEC letter says it’s ok for customers seeking to swap between digital assets to submit trade orders and confirmations at the same time, instead of independently.

The clarification should help make platforms like Coinbase more secure against SEC action, allowing customers to use the service with confidence. 

A few other conditions apply to broker-dealers executing customer trades, including holding a reserve of $250,000 in net capital. But Drew Hinkes, an attorney at US law firm Carlton Fields, tweeted that it’s still difficult for broker-dealers to determine which cryptocurrencies are legal to trade in the first place.

Broker-dealers don’t have a solid answer as to which cryptocurrencies are legal to trade and which are not, he said. Questions also remain about how broker-dealers should handle SEC Rule 15c3-3, which requires broker-dealers to maintain physical possession of customer assets.

The added clarity on crypto trades is surely a welcome notice for crypto businesses like Coinbase. But Friday’s letter shows that the SEC is still plugging away at making sense of crypto issues in the US, and that there’s plenty more to do.

Popular Articles

XRP price rallies 91% in a month due to 3 fundamental factors

In the past month, the price of XRP rallied 91% as the digital asset at last found some spark and is now playing catch up...

Bitcoin’s Risk-Adjusted Returns Make It a Better Investment Vehicle than Gold

Bitcoin’s price has been caught within a bout of range-bound trading throughout the past few days, with the support at $18,000 and resistance at...

U.S. feds forget to seize $400k in Bitcoin forks

Crypto research firm Coinfirm has found that US authorities have left “substantial funds” left on various cryptocurrency wallets seized from criminals over the years,...

Biden plans for former Fed Chair and noted Bitcoin bear to lead US Treasury

As President-Elect Biden continues to round out his roster of appointees, he has tapped an Obama-era chair of the Federal Reserve to lead his...

Polymarket reveals change in sentiment around ETH 2.0 Genesis event

One of the most hotly debated topics in crypto of late has been the question of whether the Ethereum 2.0 Genesis event will take...

SEC Chairman Jay Clayton Explains US Crypto Regulation, Calls Bitcoin a Store of Value

The chairman of the U.S. Securities and Exchange Commission (SEC) has explained how the U.S. government is regulating cryptocurrency. He calls bitcoin a store...