- The SEC says that crypto startups could soon enter the regulated brokerage market
- More than a dozen firms have already applied for a brokerage license
- Those companies that provide non-custodial services could enter the market sooner
- The SEC and FINRA have released a Joint Statement on Broker-Dealer Custody of Digital Asset Securities
Governments all around the world are slowly starting to realize the massive potential that the blockchain technology holds. With the likes of Australia and Singapore already a step ahead, others don’t want to be left behind as well. Most recently, the SEC, headquartered in Washington, is said to be preparing itself to let cryptocurrency start-ups into Wall Street. Wall street, home to the world’s largest stock exchanges could soon shelter digital-asset brokers as well. The Securities and Exchange Commission said on Monday that any start-ups hoping to use blockchain technology for uses such as raising capital could soon be able to do so under proper regulation, reports the Wall Street Journal.
Complete crypto-brokerage services still a long way away
The cryptocurrency industry is still in its infancy and a long way from mainstream adoption. The industry is surrounded by reports of scams and Ponzi schemes; this is one of the primary reasons that governments all over the world are so hesitant about adapting this revolutionary technology. The report mentions that the firms that are hoping to provide complete brokerage services such as facilitating trades and holding customer securities have a long way to go because the government bodies are still not sure about the ability of the crypto industry to safeguard the customer’s assets from the attackers that have been looming around, also the common act of losing one’s private keys that act as the password as well as the proof of ownership.
According to reports, nearly two dozen companies are seeking to acquire approval as licensed brokerages and some of the applications have been pending for more than the standard six months period for regulators that are still trying to take a decision. The biggest challenge for any firm right now is to convince the regulators that they are capable of safeguarding the customers’ assets in case the brokerage goes out of business. The SEC requires the use of regulated, third-party repositories to safeguard the client’s assets, but that is non-existent in the crypto industry.
SEC sees bright future for crypto – if it is regulated
When it comes to digital assets, using third-party custodians increases the risk of the securities being stolen or lost. No broker will be able to reverse a transaction if it goes to a wrong address. A Joint statement from the SEC Division of Trading and Markets and FInra’s office of general counsel was issued on July 8, 2019, to address the matter. The statement mentions:
“In the case of a digital asset security that does not meet the definition of ‘security’ under SIPA, and in the event of the failure of a carrying broker-dealer, SIPA protection likely would not apply and holders of those digital asset securities would have only unsecured general creditor claims against the broker-dealer’s estate.”
However, firms that limit their services to ones that don’t involve holding client assets could be a part of the regulated industry soon. This would mean that the firms could provide services like helping a private company raise capital by connecting them to investors looking to buy digital-assets. “Noncustodial activities involving digital assets do not raise the same level of concern,” the SEC and the Financial Industry Regulatory Authority said in their joint statement.