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USA: a Step Closer to Proper Digital Asset Regulations

06 October 2020 12:43, UTC
Veronika Malinboym

A wave of enhanced and nuanced regulations of digital asset transactions that swept the world recently did not miss the United States. According to the new letter issued by the US Securities and Exchange Commissions on September 25th, the process of broker-dealer operated digital asset securities will become far less lengthy and complex and far more secure.

What Was It Like Before?

Prior to the introduction of the new no-action letter, the process of operating such transactions was both difficult, multi-stage and, often subjected to security risks and penalties. Here is a breakdown of what it used to look like:

  1. Within the Alternative Trading System (ATS) to launch an operation the parties involved first had to submit their orders to the system.
  2. The system processes the order and finds an appropriate match.
  3. Both parties are then made aware of the match that the system has found.
  4. Finally, the transaction is carried out between the parties themselves or the custodians of the asset.

Such a process, despite its unnecessary lengthiness, subjected its customers to risks of underperformance and, in some cases, even bankruptcy. Following the emerging interest towards the digital space, that seems to be occupying the minds of politicians from all around the world, the US Financial Regulatory Authority decided to step in and provide more clarity and transparency to the overall process.

One Small Step Closer To Regulated Digital Space

Having assessed the aforementioned, and, largely outdated, code of conduct, the US regulatory came up with what seems to be small, at first sight, but is actually quite a major development in the grand scheme of things.

The newly introduced SEC no-action letter will reduce the process described above to only three stages, and here is how:

  1. As per usual, both parties will have to submit their orders to the ATS, however, as of now, they will have to make their custodians aware of the fact that the order has been submitted and that they are not required to carry out and complete the transaction.
  2. The system will find an appropriate match.
  3. Both the parties involved and the custodians are made aware of the match that has been found by the system. In turn, custodians will have to step in and carry out the transaction.

By making what used to be a 4-stage process into only three steps, the US SEC has significantly decreased the number of risks and exposure associated with such operations. It is, however, necessary to note that not every single broker-dealer operation of this kind will be left unpenalized under this no-action letter. The new regulations specify that broker-dealers have to manage a transaction with a minimum of 250 000 USD involved, as well as make sure that the customers have a full understanding of the fact that their brokers carry no responsibility for the possible delays and losses that might occur during the deal. Moreover, the security tokens have to be rightfully registered with the SEC and abide by the US federal law.

About the author

Upon Receiving her BA HONS in International Relations and MSc in Defense, Development and Diplomacy at Durham University, Veronika Malinboym has worked as a news producer for RT International News Channel.

Image courtesy of Nasdaq