SEC Releases New Guidelines on Securities Laws Applicable to Crypto Activities

The staff of the U.S. Securities and Exchange Commission (SEC) ( Division of Trading and Markets ) has issued comprehensive guidelines explaining how current federal securities laws apply to cryptocurrency activities.

The newly published document addresses questions related to broker-dealer financial responsibilities, transfer agents, securities and non-securities crypto assets traded on national securities exchanges and alternative trading systems (ATS), as well as exchange-traded products (ETPs).

Brokers Allowed to Facilitate "Physical" Transactions

In 2020, the SEC issued a statement providing a safe harbor for brokers that custody digital assets following certain strict procedures. This statement is non-mandatory. Brokers may still custody crypto securities under existing standard rules.

According to the update, Rule (15c3-3) requires broker-dealers to ensure the safety of customer securities, which does not apply if the assets are not securities. However, if they are securities, broker-dealers can use different parts of Rule (c) to ensure their safety, even if they are digital rather than paper.

Brokers are permitted to facilitate "physical" transactions. However, if a broker holds crypto assets such as Bitcoin or Ethereum on its books, it must consider the associated risks.

Additionally, to protect non-securities crypto assets held by brokers, clients may be able to treat these assets as "financial assets" under Section 8 of the Uniform Commercial Code.

This means the assets would be held in a "securities account," making it more likely they will be returned to the client if the broker goes bankrupt. However, the Securities Investor Protection Corporation (SIPC) (the Securities Investor Protection Corporation ) does not cover these non-securities crypto assets, so there remains a risk of loss.

Investors working with crypto assets (securities) should verify whether the entity handling their assets is registered as a transfer agent with the SEC. But this depends on the specific activity.

If they are responsible for registering transfers, monitoring issuances, or securities exchanges, and the assets are registered with the SEC, registration may be required. Investors must ensure that the entity handling their crypto assets complies with SEC rules to avoid potential risks.

Multiple entities can perform these tasks for the same issuer, and specific rules govern their relationships. Therefore, it’s not just about the entities themselves. Registered transfer agents can use blockchain technology for record-keeping, but must comply with SEC regulations regarding accuracy and security. This is crucial for increasing transparency and safety for investors.

SEC Commissioner Hester M. Peirce issued a separate statement, stating that the guidelines provide valuable clarity. She said that these guidelines now offer clear direction for broker-dealers providing custody services, especially in terms of private key protection in line with industry best practices.

Crypto "Pair" Trading Approved
The document also addresses trading mechanisms on alternative trading systems (ATS) and national securities exchanges (NSE). Staff confirmed that federal law does not prohibit "pair" trading.

Investors can breathe a sigh of relief when dealing with exchange-traded products (ETPs). SEC staff will not oppose these products operating under the conditions described in the 2006 no-action letter regarding commodity investment tools.

To do so, crypto ETP shares must be listed and traded on a national securities exchange (NSE) approved by the SEC. However, parties cannot engage in prohibited activities beyond the scope of Regulation M distribution.

The rules include: crypto ETP shares must be listed and traded on an NSE approved by the SEC and comply with Regulation M. Anti-fraud and anti-manipulation rules still apply. Additionally, governance processes such as protocol upgrades, changes, airdrops, and token swaps should be reviewed under the new guidelines to identify potential vulnerabilities affecting holdings.

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