SEC Adds FAQs on Crypto Pairs Trading and ATS Operations

The SEC Division of Trading and Markets (the Division) issued new guidance on the regulatory treatment of security/non-security crypto asset pairs trading, alternative trading system ("ATS") disclosures, and clearing agency registration requirements.   

In the new FAQs, the Division answered questions on:

Pairs Trading: The Division stated that federal securities laws do not prohibit National Securities Exchanges ("NSEs") or ATSs "from offering pairs trading" involving a crypto asset security and a non-security crypto asset (e.g., swapping a security token for a non-security coin without converting to fiat). The Division noted that ATSs must still comply with Regulation ATS recording and reporting rules. For transactions based on non-USD assets, the Division said ATSs could use "consistent, impartial, and reasonable methods [to] convert[] value[s]" to USD for regulatory reporting and NMS quotation data.

ATS Disclosures: The Division confirmed that Form ATS and Form ATS-N can accommodate disclosures on crypto asset security operations. The guidance specifies that broker-dealers must disclose differences in subscriber access, onboarding conditions, clearance and settlement processes, and trading operations specific to crypto asset activities, including pairs trading.

Broker-Dealer Operator Functions: The Division clarified that a broker-dealer operator of an ATS is not prohibited from performing custodial, brokerage, or clearing functions in addition to operating the ATS. The operator must comply with the federal securities laws applicable to each specific activity.

Clearing Agency Registration: The Division stated it would not require separate clearing agency registration if the broker-dealer operator clears and settles customer transactions (such as by debiting and crediting internal accounts) as part of "customary brokerage or dealing activity."

Regulation M: Addressing crypto ETPs, the Division stated it would not object if persons transact in shares of crypto ETPs under the circumstances described in the Staff’s 2006 Regulation M no-action letter on commodity-based investment vehicles. This applies provided the ETP shares are listed on an NSE and participants do not engage in prohibited activities outside the Regulation M distribution.

The updated FAQs retain and reiterate prior Staff views on broker-dealer custody under Rule 15c3-3 ("Customer protection-reserves and custody of securities"), the application of SIPA to non-security crypto assets, capital requirements for proprietary crypto positions, and the use of blockchains by transfer agents.