The SEC Just Reduced Risk For Broker-Dealers Like Coinbase

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.

/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,

— Drew Hinkes (@propelforward) September 26, 2020

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.