Federal Register :: Regulation of Exchanges and Alternative Trading Systems

Digital asset platforms, which are considered trading securities in the US, are subject to securities laws requiring such platforms to be registered as a national securities exchange (NSE) or fall within an exemption from an NSE registration. One exemption from registration as an NSE allows a company to conduct a digital asset platform business if such company is registered as an ATS. Having experience in digital assets, including security tokens, and traditional securities, we represent our clients before the SEC and FINRA throughout the whole ATS registration process to achieve the result. Our partners are in the constant process of communicating with the SEC and FINRA representatives regarding the most efficient ways of registering and operating an ATS.

In particular, commenters noted that broadening the “exchange” definition could have a widespread impact on an unknown number of market participants that could find that they are captured by the new definition. To that end, the SEC is seeking additional comment from interested parties beyond just the crypto industry. Assuming the SEC views such token holders as a “group of persons,” who should register as the exchange or seek ATS registration? In the SEC’s view, that is a problem for the “group of persons” to figure out, and if they fail to do so, then the whole group can be liable for acting as an unregistered exchange.

• The revised law confirms that DIFC-registered entities can supply services and products outside the DIFC, as long as they are primarily provided out of the firm’s premises in the DIFC area.
• The benefit of using an ATS to execute such orders is that it reduces the domino effect that large trades might have on the price of an equity.
• A hedge fund interested in building a large position in a company may use an ATS to prevent other investors from buying in advance.
• Institutional investors may use an ATS to find counterparties for transactions, instead of trading large blocks of shares on national stock exchanges.

A few cryptocurrency related platforms have already started the process to become an ATS, with more likely to follow. Another option for a cryptocurrency exchange is Regulation ATS (Reg ATS), which exempts an ATS from registering as a national securities exchange if it registers as a broker-dealer and provides the SEC with certain information regarding its operations on Form ATS. An ATS generally receives and executes orders in securities electronically through its trading system. While exempt from registration as a national securities exchange, a firm relying on Reg ATS (known as a sponsor) remains subject to several regulatory requirements, some of which are required by Reg ATS, and some of which are due to its status as a broker-dealer. The SEC's statement concludes that an online trading platform which brings together buyers and sellers of digital assets deemed to be securities would need to be registered with the SEC as a national securities exchange under Section 6 of the Exchange Act unless it is otherwise exempt from such registration. As noted above, DEXs are intended to be peer-to-peer marketplaces where tokenholders control their crypto wallets and trade directly with each other via smart contracts, and transactions are settled directly on the relevant blockchain.

The applicant then proceeds to satisfy the in-principle conditions, and this involves the setting up of a legal structure, opening a bank account, and depositing the share capital in the account. Other tasks include finalization of auditors and obtaining professional indemnity insurance for the firm. The revised law confirms that DIFC-registered entities can supply services and products outside the DIFC, as long as they are primarily provided out of the firm’s premises in the DIFC area.

Setting the legal theory aside, consider how, or if, this “group” would choose to defend itself or settle an enforcement action when it does not even view itself as a “group” who agreed to establish an exchange in the first place, and the group members likely do not even know the other persons in the group. Another example is that Crypto Whales are known to hold large amounts of cryptocurrency. They frequently desire anonymity and conduct their transactions in ATS venues rather than national cryptocurrency exchanges. It is unclear exactly how long a particular ATS application will take to be approved – it will largely depend on the exact scope of activities the platform will be involved with.

Form ATS is the official SEC notification and must be submitted at least 20 days before the firm begins to operate its platform. Nonetheless, the SEC waited only a weekend before bringing a new enforcement action against a centralized crypto exchange for acting as an unregistered exchange, broker-dealer, and clearing agency. Further, the reopening comes on the heels of an announcement that the SEC issued a Wells Notice to one of the world’s largest centralized crypto exchanges covering a wide array of potential violations that also could implicate unregistered “exchange” activity. Earlier, only persons who met certain criteria were allowed access to DFSA-regulated exchanges, clearing houses and ATS platforms.

Our account funding and transfer supervision services offer meticulous oversight, striving to align every transaction with regulatory standards and secure client assets. (B) With respect to corporate debt securities, 20 percent or more of the average daily volume traded in the United States. (D) With respect to corporate debt securities, 5 percent or more of the average daily volume traded in the United States. The CAT Technical Specifications for Industry Alltoscan Worth Ats Price Members require Industry Members operating ATSs (“Industry Member ATSs”) to populate the atsOrderType field on CAT Equity New Order and Order Accepted events. CAT will provide an ATS Order Type Entry Screen on the CAT Reporter Portal that will enable Industry Member ATSs to register ATS Order Types with CAT. Industry Member ATSs are required to register these ATS Order Types with CAT at least 20 days prior to the Order Type becoming effective.

The amendments will be published on the SEC’s website and in the Federal Register and will become effective 60 days from the date of publication in the Federal Register. An existing NMS Stock ATS will be required to file a Form ATS-N no earlier than January 7, 2019 and no later than February 8, 2019. A new entity seeking to operate as an NMS Stock ATS will be required to file a Form ATS-N starting January 7, 2019. From inital consultations, to assistance in authorisations, to assistance in preparation of the legal documentation, 10 Leaves helps you navigate the DFSA Rulebook and submit an application that is comprehensive, complete and compliant.

In consideration of these recent events and pronouncements, other digital asset exchanges should take note of the regulatory concerns and exemptions related to their operations. While it appears that Coinbase's determination is related to its intention to broaden its offering beyond traditional cryptocurrency, the SEC's statement regarding the trading of digital assets leaves little doubt that, in its view, most ICOs will constitute a securities offering. This client alert provides a brief overview of the registration options available to digital asset platforms and the benefits and restrictions of registration as a national securities exchange, a broker-dealer operating an alternative trading system (ATS) or a funding portal. Coinbase, one of the largest cryptocurrency exchanges, recently approached the U.S.

Institutional investors may use an ATS to find counterparties for transactions, instead of trading large blocks of shares on national stock exchanges. These actions may be designed to conceal trading from public view since ATS transactions do not appear on national exchange order books. The benefit of using an ATS to execute such orders is that it reduces the domino effect that large trades might have on the price of an equity.

There are a number of SEC reporting requirements for any Alternative Trading System. The public and stock holders may mistake a large buy or sell transaction in an asset as having some greater meaning. Large transactions often cause unproductive price movements as buy/sell orders are processed.

After registration, the ATS will have to comply with ongoing reporting requirements and other obligations, such as file quarterly transaction summaries and permit examination and inspection of the site, systems, and records by the SEC and FINRA in case of inspection or investigation. Also, as broker-dealers and FINRA members, ATSs platfroms are subject to strict standards of due diligence. To comply with Regulation ATS, an ATS must register as a broker-dealer and file an initial operation report with the Commission on Form ATS before beginning operations.

The regulator maintains communication with the applicant at all times during the review, reverting with an initial review 2 weeks into the application, and then follow-up reviews thereafter. The DFSA also meets with the SEO, FO, Technology Head and CO/MLRO designates, and conducts a detailed interview with them. There may be additional rules to follow, for instance, when actively marketing funds from the DIFC.

The DFSA aims to take a hybrid approach, where they will make their own assessment of whether the proposed token is a Security Token, based on a self-assessment submitted by the applicant. In general, a transaction is considered a security if a) there is an investment of money, b) there is an expectation of profit, c) the investment of money is in a common enterprise and d) any profit comes from the efforts of a promoter or third party. In effect, a Security Token is a token that behaves as a security (equity, debenture, convertible, future, option etc.) and is hence considered by the DFSA as a specified investment.