Crypto broker dealer +custody issue

The current CEO of ripple argues that it is a currency and not subject to SEC control.

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SEC Files Action Against Ripple And Two Senior Executives; SEC Issues Comment For Digital-Asset Securities Custody By Special Purpose Broker-Dealers, crypto broker dealer +custody issue.

This will play out in the southern district courts. Ripple would be hard-pressed to assert that 100 billion XRP issued and controlled by a few individuals is a currency, especially if a huge proportion of it is already used to personally enrich individuals. Freely printed private money is off the table for now, even those tethered with fiat backing is being questioned. This is in contrast to BTC and ETH, which have strict controls on money supply and many other characteristics and are more like currency. Utility tokens, security tokens and the howey test are familiar to us from the arguments that raged in 2017-2018 in the crypto-sphere. There was even a speech from a fed governor that called for a conversion of a security token into a utility token as a project matures and the attendant changes in the regulatory agencies that would be needed to control the same token. SEC has undertaken actions against a variety of ICO exchanges and icos in the last couple of years. The XRP case is the first one against such a huge token. The members of ripplenet, major international banks including bank of america, santander and standard & chartered may stick with ripple through this rough patch. Although it could be unwise to bet on that outcome. The flip side of the story are non-cash digital assets. SEC has every right to regulate digital security assets. There are multiple reasons why existing securities and bonds should be tokenised on a shared ledger, a ledger that is selectively visible to beneficial owners, custodians, regulators and issuers in the settlement and custody segments of post-trade activity.The SEC statement and request for comment focuses on custody of digital asset securities. The statement says that a broker dealer operating under the conditions set forth in the statement will not be subject to SEC’s enforcement action for the next five years. It is a broad no-action letter on digital asset security custody. More of a beach than a sandbox. However, this beach is very narrow. It is an elucidation of rule 15c3-3 or the consumer protection rule for digital asset securities. The current rule requires brokerages to have complete possession of customers’ securities in a separate account unbreachable by the bankruptcy of the custodian. Multiple segregated accounts are to be maintained, based on whether the asset is fully owned, as a margin, or functioning as collateral.

SEC files action against ripple and two senior executives; SEC issues comment for digital-asset securities custody by special purpose broker-dealers

The last few days have created whiplash in the crypto-community. On tuesday, december the 22nd, the securities and exchange commission filed charges against ripple and two of its senior executives for operating a unregistered securities offering. On wednesday the 23rd, the SEC issued a statement and request for comment on the custody of digital asset securities by broker-dealers. These actions are two sides of the same coin. The moves by the SEC are a guide to what is in store for 2021. Support for innovation in the regulated securities market and clamp down on uncontrolled token issuance. Many more icos and ERC-20 tokens masquerading as utility tokens can expect actions from the SEC. Further, increased clarity on digital asset securities custody will lead to digital transformation of financial market infrastructure.

Captured from the SEC website by vipin bharathan

The SEC’s rationale for the action against ripple is stated in their press release and is detailed in the accompanying complaint before the southern district of new york. Reading through the 71 page complaint shows the usual diligence and attention to detail that back the SEC’s claim that XRP is a security. Even though it is about seven years since the creation of XRP and ripple labs, the SEC argues that the individuals charged in the suit as well as ripple labs had ample warning not to proceed on the course they took. XRP’s value, although not downed like a shot dog, dropped rapidly. The drop in the last few days has taken off more than 50% of its value since monday the 21st. This has brought the crypto-twitter army out in full force. The XRP holdlers were irate at the SEC. The various strands of outrage included the following familiar tropes: the SEC has put a stake through american innovation, the SEC are getting paid by china, if SEC wanted to support ordinary investors then it should have taken action seven years ago, jay clayton is stabbing innovators on his way out etc. Among the adherents of BTC and ETH, there was plenty of schadenfreude.

The current CEO of ripple argues that it is a currency and not subject to SEC control. This will play out in the southern district courts. Ripple would be hard-pressed to assert that 100 billion XRP issued and controlled by a few individuals is a currency; especially if a huge proportion of it is already used to personally enrich individuals. Freely printed private money is off the table for now, even those tethered with fiat backing is being questioned. This is in contrast to BTC and ETH, which have strict controls on money supply and many other characteristics and are more like currency. Utility tokens, security tokens and the howey test are familiar to us from the arguments that raged in 2017-2018 in the crypto-sphere. There was even a speech from a fed governor that called for a conversion of a security token into a utility token as a project matures and the attendant changes in the regulatory agencies that would be needed to control the same token. SEC has undertaken actions against a variety of ICO exchanges and icos in the last couple of years. The XRP case is the first one against such a huge token. The members of ripplenet, major international banks including bank of america, santander and standard & chartered may stick with ripple through this rough patch. Although it could be unwise to bet on that outcome.

The flip side of the story are non-cash digital assets. SEC has every right to regulate digital security assets. There are multiple reasons why existing securities and bonds should be tokenised on a shared ledger, a ledger that is selectively visible to beneficial owners, custodians, regulators and issuers in the settlement and custody segments of post-trade activity.The SEC statement and request for comment focuses on custody of digital asset securities. The statement says that a broker dealer operating under the conditions set forth in the statement will not be subject to SEC’s enforcement action for the next five years. It is a broad no-action letter on digital asset security custody. More of a beach than a sandbox. However, this beach is very narrow. It is an elucidation of rule 15c3-3 or the consumer protection rule for digital asset securities. The current rule requires brokerages to have complete possession of customers’ securities in a separate account unbreachable by the bankruptcy of the custodian. Multiple segregated accounts are to be maintained, based on whether the asset is fully owned, as a margin, or functioning as collateral.

In the SEC statement, the consumer protection rule is taken to its extreme by the fears associated with digital asset securities, especially the possibility of breach or theft and non-recoverability of the digital asset security through the theft of private keys. This possibility is inflamed further by the stealth, scale and rapidity of such an attack in the SEC’s note, which could result in the rapid bankruptcy of the custodian. All securities could be drained from the custodian in a very short period of time. Hence, the broker-dealer must limit its business to digital asset securities. This will advantage businesses who have limited themselves to this sector today. Other traditional broker dealers have to establish a separate legal entity to comply with the requirements. Some have already done so. Some have pointed out that this may have beneficial effects even in current broker-dealers, by separating the digital asset business unit from others, resulting in a sheltering from attacks from established business units. This effect may be an emergent effect of such a guidance. Emergent effects are often the result of unforeseen or secondary effects of sticking to the letter of the regulation in the wild.

SEC gives broker-dealers room to handle crypto securities

The U.S. Securities and exchange commission (SEC) is showing signs it might budge on letting crypto custodians become regulated broker-dealers specifically for digital assets.

The commission announced wednesday that it would let crypto-focused broker-dealers operate for five years without fear of an enforcement action provided they can verify they have possession and control of customers’ digital asset securities. The SEC is looking for feedback on the proposal, which comes after months of industry requests for clarity around the issue.

“as discussed below, the commission’s position in this statement is premised on a broker-dealer limiting its business to digital asset securities to isolate risk and having policies and procedures to, among other things, assess a given digital asset security’s distributed ledger technology and protect the private keys necessary to transfer the digital asset security,” the SEC said in its published statement.

The SEC announcement was generally welcomed as a step in the right direction by industry players.

“this is positive from the SEC because it’s enabling rather than restrictive,” tweeted caitlin long, CEO of wyoming-based crypto bank avanti financial.

Stepping back, the SEC has been accused of stonewalling efforts by digital asset custodians to become regulated federal broker-dealers. Securing a broker-dealer registration would let these companies offer securities for trading in the U.S., including security tokens.

A handful of startups already offer such services.

Securitize CEO carlos domingo said it was “potentially very good news” for broker-dealers operating in the security token space, including his firm. He told coindesk that “lack of broker-dealer custody has been a major point of stagnation” for crpyto securities.

Kristin smith, executive director of the blockchain association, told coindesk that her organization “applauds the SEC for releasing a long-awaited path forward for broker-dealer custody of digital asset securities. Regulatory certainty on this issue will enable the custody marketplace to develop and give consumers the confidence they need that their digital assets are safe and secure.”

U.S. Representative patrick mchenry, ranking member on the house financial services committee, said he was pleased by the SEC’s action in a statement.

“digital asset custody is a major outstanding regulatory issue, and I appreciate that the SEC is taking steps to allow for further market developments. I look forward to continuing to work with the commission and market participants to allow further growth in this space,” he said.

Broker-dealer saga

The SEC, alongside the financial industry regulatory authority (FINRA), which works with the SEC but is actually tasked with approving broker-dealer applications, said last year that there are questions about whether digital asset custodians can effectively comply with the customer protection rule, a part of the securities exchange act of 1934 that requires broker-dealers “to promptly obtain and thereafter maintain physical possession or control of all fully-paid and excess margin securities it carries for the account of customers.

On wednesday, the SEC said it wants public feedback on how companies can effectively comply. However, “as an interim step,” it’s creating what amounts to a five-year safe harbor, letting companies provide broker-dealer services under a set of specific conditions.

The SEC also said its five-year period will give the agency a chance to better understand how it can regulate the space.

According to its press release, the SEC wants public feedback. The statement will be published in the federal register and takes effect 60 days after that.

UPDATE (dec. 23, 2020, 19:52 UTC): updated with additional comment.

SEC asked by US lawmakers to clarify crypto rules for broker-dealers

Last updated: 14 december 2020

Nine lawmakers within the US house of representatives have teamed up to seek clarity regarding regulations over the custody of digital currencies for broker-dealers, asking the US financial regulators about it.

As it stands now, this group of lawmakers stands convinced that digital currencies and their adoption could be led to greater heights through some clarification. This, in turn, would see the securities market’s overall increase in functionality.

Threats to the US crypto space at large

The letter itself was penned by the lawmakers and addressed the securities and exchange commission, or SEC. In particular, the letter is targeted at one jay clayton, the chairman of the organization. The lawmakers have urged clayton, as well as the financial industry regulatory authority (FINRA), to start catching up when it comes to crypto custody regulation for broker-dealers.

In particular, the lawmakers made reference to the office of the comptroller of currency (OCC) issuing out a guidance back in july, stating that national banks within the US were allowed to provide crypto custodian services.

The letter stipulated that, in light of the OCC already giving out guidance, they actively encourage SEC to do its part in the development of custodian requirements. From there, they request that it allows FINRA to start the approval process for any broker-dealer attempting to meet said conditions.

Lack of clarity damaging crypto space

Through a joint statement made back in july of 2019, both FINRA and the SEC actively acknowledged the issue. At that time, it was claimed that a number of issues need to be addressed first before any crypto firm could get the green light to serve as a broker-dealer. Of these issues, it’s stated that consideration needs to be done whether or not crypto are securities that fall under the securities investor protection act.

Even so, the lawmakers sending the letter pointed out that neither of the two agencies has gone out to acknowledge the issues since. As such, the letter claims that this lack of guidance could potentially stunt the US crypto industry’s growth, making it take longer than it should.

Both sides keen on seeing this through

The letter explained that the issue with failing to give the various broker-dealers seeking crypto custody services their approval, or even refusal, is that there is no way for the industry to develop an infrastructure. With no infrastructure, the space can’t operate in any regulated way.

As for the lawmakers themselves, it stands as a bipartisan group. The lawmakers themselves are: ro khanna (california), tom emmer (minnesota), dan crenshaw (texas), darren soto (florida), ralph norman (south carolina), ted budd (north carolina), david schweikert (arizona), bill foster (illinois), and warren davidson (ohio).

Pro-blockchain congressmen ask SEC for clarity on crypto custody

A bipartisan group of representatives has written a letter to the SEC emphasizing “the need for regulated safekeeping services for cryptographic assets.”

Dear crypto regulators, give us a sign. Image: shutterstock

In brief

Nine members of the house of representatives have signed a letter to SEC chairman jay clayton.

According to the letter, a lack of guidance from the SEC has left would-be crypto broker-dealers in a state of limbo.

It asks for clarity around broker-dealer applications to FINRA.

A group of nine congressmen has signed a letter addressed to SEC chairman jay clayton, asking for more clarity around broker-dealer applications for companies in the crypto space.

The signatories include tom emmer (R-MN-6), bill foster (D-IL-11), david schweikert (R-AZ-6), and darren soto (D-FL-9), who co-chair the congressional blockchain caucus, along with warren davidson (R-OH-8), ted budd (R-NC-13), ralph norman (R-SC-5), and ro khanna (D-CA-17), who are members. Dan crenshaw (R-TX-2) was the only non-member to sign the letter.

According to a press release from tom emmer's office, the congressmen request three things:

"first, issue a formal clarification that banks may act as good control locations for the custody of digital securities. Second, advise FINRA on the specific criteria that must be met for broker-dealers to custody digital securities for their customers and for their own account. Third, instruct FINRA to approve broker-dealer applications that meet those requirements."

In order for a company to issue securities aimed at US investors, either conventional (like stocks) or digital (like blockchain-based tokens offered via an ICO), it has to register with the financial industry regulatory authority (FINRA), a self-regulatory organization authorized by the government to grant official broker-dealer status.

Once a company becomes a broker-dealer in the eyes of FINRA, it can begin buying and selling securities for clients and/or itself, as well as hold digital securities.

. @brianbrooksocc and the @USOCC have provided clarity for banks to custody crypto - now it’s @sec_news’ turn. Today, I led a letter with 8 of my colleagues urging the SEC and @FINRA to issue guidance and approve broker-dealer applications to custody digital securities. Pic.Twitter.Com/ztb4ui13l3

But FINRA may be unsure what to do with cryptocurrency firms.

The letter to clayton asserts that “in the absence of guidance from the SEC, FINRA has not outright denied any broker-dealer applications that involve the custody of digital securities, which would render the applications eligible for appeal.” instead, the representatives claim, those applications have been in a state of limbo.

As evidence, they point out that the SEC and FINRA issued a joint statement in july 2019 acknowledging that more and more companies were looking to hold digital securities, but that neither organization has done much about it in the way of providing guidance.

The congressmen are asking that the SEC help FINRA guide qualifying companies toward becoming approved broker-dealers, and that the SEC explicitly confirm that banks can hold digital securities—something the office of the comptroller of the currency, an office of the US treasury that’s currently being run by former coinbase executive brian brooks, has already suggested .

SEC: broker-dealers holding security tokens won’t be subject to enforcement action for 5 years

United states securities and exchange commission (SEC) today issued a statement and requested for comment on the issue of “custody of digital asset securities by broker-dealers.” the federal agency believed this would encourage innovation around the application of securities exchange act rule to digital asset securities.

According to the commission, a broker-dealer operating under certain “circumstances” will not be subjected to enforcement action for a period of five years. Among others, the broker-dealer must have control of customer “fully paid and excess margin digital asset securities.”

Additionally, such circumstances include that the broker-dealer limits its business to digital asset securities. It requires that broker-dealers must establish and implement procedures to mitigate risks associated with conducting its business. SEC stated that broker-dealers must also make their customers aware about trading risks.

Further, SEC asked for comments on allowing investors to use BTC and ETH to pay for security tokens:

Should this position be expanded to include the use of non-security digital assets as a means of payment for digital asset securities?

Recently, congress members asked the federal agency to verify rules as to which broker-dealers can custody digital securities. In a letter which also addressed FINRA the officials wrote :

In the absence of guidance from the SEC, FINRA has not outright denied any broker-dealer applications that involve the custody of digital securities, which would render the applications eligible for appeal. Rather, FINRA has allowed the applications to languish—often for years—or asked the applicants to withdraw such applications.

Custodians vs. Broker-dealers: why it matters for cannabis etfs

People's attitudes about pot are changing. In fact, more people believe it should be legal—both recreationally and for medical purposes. Despite being classified as a controlled substance at the federal level, more states are taking the opposite route by legalizing marijuana. This not only has pot enthusiasts excited, but it also means big moves in the investment world.

Several companies have launched their own exchange-traded funds (etfs) in an effort to capitalize on the moves sweeping the nation, giving investors exposure to companies that deal directly with the growth of marijuana plants, as well as software, technology, and other parts of the industry. But because of the issues surrounding the legality of cannabis, there are still challenges these ETF issuers face—notably, the issue of custody. Who will hold these etfs' securities? Regular etfs use custodians to handle their assets, but those involved with pot stocks and securities may have to go through broker-dealers. But what's the difference? Keep reading to find out more about these two entities as well as the implications of pot-related etfs.

Key takeaways

Custodians are generally large financial institutions that hold their customers' securities.

Broker-dealers range in size and can buy, sell, or hold securities for their clients.

Although regular etfs use custodians, cannabis etfs generally have to use broker-dealers to hold their assets because the drug is still illegal at the federal level.

Some pot etfs are using bank custodians but had to provide additional details upfront including potential securities in which they would invest.

Custodians vs. Broker-dealers

Custodians are generally large financial institutions that are in charge of holding their customers' securities. As such, they're responsible for safeguarding their clients' assets, whether they are in physical or electronic form. These entities may also provide other services such as tax support, account administration, transaction settlements, and interest payments. Broker-dealers, on the other hand, tend to range in size, varying from small independent operations to subsidiaries of larger investment banks. These entities are in charge of buying and selling different securities for their clients. They can hold stocks just like bank custodians do, and they are also free from federal banking laws.

As mentioned above, traditional etfs often use custodians, which fulfill several key actions including sending and receiving payments, and holding any cash and/or securities held in the fund's portfolio. But things get a little fuzzy when it comes to the pot industry. That's because questions of custody have been crucial for marijuana etfs—custodial risk has historically been a significant issue for these etfs. This is partly due to the fact that many major U.S. Banks are reluctant to serve as custodians of funds invested in cannabis.

Although recreational cannabis is legal in more than a dozen states and medically available in many others, the specifics of legalization policy vary from state to state—to say nothing of how marijuana is still illegal at the federal level. That's all to say that it's difficult for a potential custodian bank to assess exactly what this role looks like when dealing with a group of marijuana companies. Even if the cannabis companies were headquartered in canada, where marijuana enjoys full legalization, U.S. Banks still assume responsibility when dealing with the U.S. Department of justice. In short, a marijuana ETF's bank custodian could face legal trouble as a result of banking laws at the federal level because of its classification as a controlled substance.

If you're interested in investing in the marijuana industry, keep your capital, time horizon, investment goals, and risk tolerance in mind—the same way you would with any other industry.

What does that mean for cannabis etfs?

The question of custody has been a big one for ETF issuers considering marijuana products. Take the example of U.S.-based ETFMG alternative harvest ETF (MJ), which already had custody issues. MJ came about through the transformation of one of ETF managers group's preexisting funds. The issuer simply swapped out indexes, circumventing the need for a new custodian. U.S. Bank—the custodian of the original fund—reacted against the change, forcing the ETF to seek out a new custodian after all. The company ended up going with a private custodian—one which didn't have to go through the same federal regulations as a public company.

But because attitudes are changing on a greater scale across the country, more banks may be willing to accept the risks associated with the pot industry. For instance, the bank of new york mellon (BK) is the custodian for the advisorshares pure cannabis ETF (YOLO) and its sister ETF advisorshares pure US cannabis ETF (MSOS), which were launched in april 2019 and september 2020 respectively. YOLO was able to secure the bank as a custodian after promising the bank and the new york stock exchange (NYSE), where it's traded, with information on any of its potential investments.

You may pay more

There are a few important things that investors should keep in mind, though. Watch out for the potential of added costs involved in participating in these funds. This may happen because of additional audits required by the securities and exchange commission (SEC) depending upon the status of who's holding the securities. The SEC requires custodians for investment vehicles like etfs to submit to annual audits of the assets contained in those funds if they are not already subject to annual audits. A privately-traded broker-dealer would not normally be subjected to these audits, so that would increase the cost of auditing requirements significantly.

The bottom line

Things are certainly changing for the marijuana industry at the state level. But because the drug is still illegal at the federal level, investors need to take a step back and rein in their excitement. Although marijuana etfs like YOLO and MSOS may have a bank willing to act as their custodian, that may not be the case with every ETF that comes along. Be sure to watch out for additional fees that cover things like surprise audits. And just like any other investment, it's important to do your research before you put any money down.

SEC gives broker-dealers room to handle crypto securities

The U.S. Securities and exchange commission (SEC) is showing signs it might budge on letting crypto custodians become regulated broker-dealers specifically for digital assets.

The SEC announcement was generally welcomed as a step in the right direction by industry players.

“this is positive from the SEC because it’s enabling rather than restrictive,” tweeted caitlin long, CEO of wyoming-based crypto bank avanti financial.

A handful of startups already offer such services.

U.S. Representative patrick mchenry, ranking member on the house financial services committee, said he was pleased by the SEC’s action in a statement.

Broker-dealer saga

The SEC also said its five-year period will give the agency a chance to better understand how it can regulate the space.

According to its press release, the SEC wants public feedback. The statement will be published in the federal register and takes effect 60 days after that.

UPDATE (dec. 23, 2020, 19:52 UTC): updated with additional comment.

SEC issues statement and requests comment regarding the custody of digital asset security tokens

The U.S. Securities and exchange commission (SEC) has previously issued a proposal for comment on rules for “self-hosted” cryptocurrency wallets. In response, US exchange coinbase requested an extension of the comment period.

Today, the U.S. SEC is gunning at exchanges with new rules to follow when dealing with security tokens, and surprisingly its clarity is mostly positive except for one glaring stipulation.

The SEC’s latest press release states that the agency has provided five more years to digital asset brokers holding custody of security tokens who are following SEC’s guidelines. This press release may ease the minds of many digital asset and crypto brokers who were under fear due to the SEC’s recent lawsuit against ripple.

Earlier this week, ripple labs, a company that owns 6.4 billion of XRP, the previous third-largest cryptocurrency by market cap was slapped with a lawsuit for dealing in securities. SEC previously has been very cautious with cryptocurrency businesses and has taken what it deems are necessary actions; for example, against ICO scams in 2017.

Crypto brokers and exchanges are suffering a lot of heat after the SEC’s recent $1.3 billion lawsuits against ripple and its executives. The SEC published an official press release titled “SEC issues statement and requests comment regarding the custody of digital asset securities by special purpose broker-dealers”.

The press release highlights the rules laid out in the securities exchange act rule 15c3-3 to digital asset securities and states that the SEC intends to utilize this act to foster innovation in the custody of digital asset securities. The press release states forth,

“for a period of five years, a broker-dealer operating under the circumstances set forth in the statement will not be subject to a commission enforcement action.”

However, written in ink are stipulations which, according to the SEC, the broker-dealer must limit its business to digital asset securities, establish and implements policies and procedures reasonably designed to mitigate the risks associated with conducting a business in digital asset securities, and provide customers with certain disclosures regarding the risks of engaging in transactions involving digital asset securities.

The commission also requested comment from relevant businesses, and the statement will become effective 60 days after publication in the federal register.

The crypto exchanges and brokers were in fear of SEC actions, and various analysts expected a wide delisting of XRP token. Founder of watchdog capital, bruce fenton, said they’d be crazy not to delist XRP:

I just read the 71 page SEC complaint vs. Ripple.

I think any crypto exchange who doesn’t delist XRP this week is out of their mind.

If the SEC says it’s a security you’d be crazy to list it without a license.

The XRP price has plummeted by more than 40% and resulted in delisting of its coin and trading desks stopping trading on several exchanges already.

SEC gives broker-dealers room to handle crypto securities

Dec 23, 2020 at 5:55 p.M. UTC updated dec 23, 2020 at 8:36 p.M. UTC

SEC chairman jay clayton (coindesk archives)

SEC gives broker-dealers room to handle crypto securities

The U.S. Securities and exchange commission (SEC) is showing signs it might budge on letting crypto custodians become regulated broker-dealers specifically for digital assets.

The SEC announcement was generally welcomed as a step in the right direction by industry players.

“this is positive from the SEC because it’s enabling rather than restrictive,” tweeted caitlin long, CEO of wyoming-based crypto bank avanti financial.

A handful of startups already offer such services.

U.S. Representative patrick mchenry, ranking member on the house financial services committee, said he was pleased by the SEC’s action in a statement.

Broker-dealer saga

The SEC also said its five-year period will give the agency a chance to better understand how it can regulate the space.

According to its press release, the SEC wants public feedback. The statement will be published in the federal register and takes effect 60 days after that.

Read the full document:

UPDATE (dec. 23, 2020, 19:52 UTC): updated with additional comment.

So, let's see, what we have: this week the securities and exchange commission filed charges against ripple for operating a unregistered securities offering. They also issued a statement on the custody of digital asset securities by broker-dealers. These actions are two sides of the same coin. At crypto broker dealer +custody issue