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In November 2022, FINRA published a podcast that discussed available guidance concerning several paths through which broker-dealers can be approved by FINRA for digital asset securities activity: 1) as a placement agent in private placement digital asset securities offerings, 2) as an ATS facilitating secondary transaction of digital asset securities, and 3) as a special purpose broker-dealer (SPBD) with custody of digital asset securities.
1) Placement agent in private placement digital asset securities offerings
The broker-dealer sends the trade-matching details (e.g., identity of the parties, price, and quantity) to the buyer and issuer of a digital asset security—like a traditional private placement—and the issuer settles the transaction bilaterally between the buyer and issuer, away from the broker-dealer. In this case, the broker-dealer instructs the customer to pay the issuer directly and instructs the issuer to issue the digital asset security to the customer directly (e.g., the customer’s “digital wallet”).
Everything happens away from the broker-dealer so it does not custody the digital asset. The broker-dealer does not handle, control, or receive customer funds or securities. Issuers and investors directly transact with each other through an escrow account established by issuer.
Key Considerations in a Placement Agent Application
2) ATS facilitating secondary transaction of digital asset securities (two types)
ATS #1: Bilateral settlement without ATS involvement
The ATS matches the orders of buyers and sellers of digital asset securities, and the trades are either settled directly between the buyer and seller or the buyer and seller give instructions to their respective custodians to settle the transactions. In either case, a broker-dealer operator does not guarantee or otherwise have responsibility for settling the trades and does not at any time exercise any level of control over the digital asset securities being sold or the cash being used to make the purchase (e.g., the ATS does not place a temporary hold on the seller’s wallet or on the buyer’s cash to ensure the transaction is completed).
ATS #2: Custodians carry out conditional instructions using information from ATS
In this case, there is a higher degree of control exercised by the broker-dealer operator because it tells the buyer’s custodian where to send the funds and the seller’s custodian where to deliver the securities. As with the four-step process, the broker-dealer operator does not guarantee or otherwise have responsibility for settling the trades and does not at any time exercise any level of control over the digital asset securities being sold or the cash being used to make the purchase (e.g., the ATS does not place a temporary hold on the seller’s wallet or on the buyer’s cash to ensure the transaction is completed) but it notifies the custodians for the buyer and seller, and the buyer and seller, of the match.
Key Considerations in ATS Applications
3) Special Purpose Broker-Dealer (SPBD) with Custody of Digital Asset Securities
The business activities of a special purpose broker-dealer are limited to digital assets that are also securities (this can include operation of an ATS that trades only in digital assets securities or otherwise engages in other business involving digital assets securities). It cannot engage in business activities involving non-security digital assets or securities that are not digital assets (e.g., traditional securities).
Key Considerations in SPBD Applications
Lastly, the FINRA podcast also identified several common issues with membership applications involving digital asset securities.
CRC has extensive experience with helping firms successfully navigate the New Member and Continuing Member Application process with FINRA. We are specifically familiar with the fintech space and offer clients the ability to quickly scale and support their application with experienced C-Suite level personnel. Contact us today to discuss how we can provide right-sized support as you consider forming a broker-dealer.
For more information, please contact:
p. (646) 346-2468
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