The Securities and Exchange Commission (SEC) has recently been focusing on the secondary trading of digital asset securities. Among the key regulatory and operational issues associated with this type of trading is the potential for conflicts of interest. Those involved in these activities may be brokers, dealers, or both.
secondary.digital registered broker-dealers must comply with legal requirements. Similarly, entities that provide services to the public through an ATS must be registered with the SEC as an ATS. However, the ATS is not required to be registered as a national securities exchange. In addition, there is an exemption under Exchange Act Rule 3a1-1(a), which allows ATSs to operate under certain conditions. Ultimately, compliance with conventional SRO regulatory practices may be difficult for decentralized platforms.
Early SEC investigations have revealed that a significant percentage of offerings in the digital asset market are high-tech heists. These types of offering prey on the popularity of cryptocurrencies and the allure of cryptography. Many of these products are pyramid schemes and Ponzi schemes. While there is currently no definitive way to determine whether these offerings qualify as securities, the SEC has a broad-based approach to regulating them.
Under the RFIA, digital assets are subject to the same reporting and licensing requirements as conventional financial assets. As such, issuers are required to disclose information on their basic corporate details, ancillary assets, risk factors specific to digital assets, and managerial efforts. This may include disclosures of the background of key employees. Issuers must also periodically report on their experience in the digital asset space.
Digital asset business operators are defined as licensed operators of digital asset businesses. Typically, these businesses exclude commercial banks under financial institution law, but insurance companies and securities companies are excluded as well. There are three main types of businesses in the digital asset industry: a dealer, an exchange, and a business operator. A digital asset business operator is generally a dealer, which provides services to the public.
An exchange is a platform that facilitates exchanges. Unlike conventional securities markets, the markets for ICOs and secondary trading of digital asset securities have unique governance and operational risks. Because of these concerns, the SEC has focused its enforcement actions on these markets. Some of the actions it has taken are directed at enhancing liquidity, price accuracy, and the ability of investors to make informed decisions.
While the SEC has taken a number of actions on digital asset securities, it may need to act in the near future to offer guidance to the market. It may choose to implement guidelines for satisfying Regulation ATS, a new regulatory framework for ATSs, which will help provide assurance to the public and ensure that entities facilitating secondary trading of digital asset securities are meeting regulatory requirements.
The SEC is developing Regulation ATS to address different types of platforms. Specifically, the ATS has been designed to address the distinct challenges involved with centralized and decentralized exchanges. Specifically, the ATS would allow the commission to promulgate rules for a wide range of blockchain-based trading platforms.