Thread by @propelforward

🚨🚨🚨BREAKING: clarity on how broker dealers should handle non-custodial digital asset securities transactions on ATS. 🚨🚨🚨 THREAD coming atcha /1

/1 since the Joint Staff Statement (July 8, 2019) which addressed BD custody & handling of trades of digital asset securities (sec.gov/news/public-st…) which emphasized consumer protection, it has not been clear how transactions on ATS should be conducted:

/2 The Joint Statement did not make clear how BDs should conduct these trades. Today's letter provides no action relief (i.e. if you do this specific thing, the SEC will not enforce against you) for a specific process flow for digital asset securities transactions by BDs

/3 A major complication is Rule 15c3-3(b), "under which the brokerdealer must obtain and maintain physical possession or control of all fully paid or excess margin securities carried by a broker-dealer for the account of customers" (law.cornell.edu/cfr/text/17/24…). However, using an ATS

/4 as a "matching engine" where the trades are settled directly between the buyer & seller, or by buyer & seller instructions to their respective custodians to settle the transactions are avaialble.

/5 In either case, a BD Operator doesn't guarantee/ isn't responsible for settling trades & doesn't exercise control over the digital asset securities being sold or the cash being used to make the purchase (i.e. no temporary hold on the seller’s wallet /buyer’s cash

/6 to ensure the transaction is completed). This is a 4 step process:

/7 Other BD's have brought to the SEC's attention a different & shorter 3 step process:

/8 The 3 step process is argued to reduce operational
and settlement risk even more than the 4 step process.

The Division of Enforcement will not recommend
enforcement action against a BD that uses the 3 step process if:

/10 OK, what does this mean? #bigpicture 1. It got easier to trade digital asset securities. 2 BDs have certainty as to how to trade digital asset securities. 3. Custodians are even MORE important.

/11 4. BDs need new procedures to assess whether a digital asset security was offered & sold initially
pursuant to an effective registration statement or an available exemption from registration,

/12 &whether any secondary transactions of the digital asset security on or through the ATS are made pursuant to an effective registration statement or an available exemption from registration and 5. This will help digital asset #security #liqiudity....right?

/13 MAYBE. We still need more ATS' approved, still need accounting standards... CUSIPs would be nice.... STILL this is an important step along the way... but a few things seem a bit odd:

/14 why the $250,000 reserve requirement? Does shifting the settlement obligation to custodians fix anything or just move the problem off the BD's books to the Custodian's books?

It looks like an effort to protect BDs from responsibility for any consumer loss- and maybe a new business line for custodians. What do you think, @collins_belton @lex_node @NYcryptolawyer ?

Link to the letter here: sec.gov/divisions/mark…