SEC Won't Take Action Against Compliance-Focused Digital Security Exchanges

Digital security exchanges that ensure listed assets are legitimate will not face sanctions, the SEC said in an open letter.

Sep 29, 2020 at 12:52 p.m. UTC
Updated Sep 14, 2021 at 10:01 a.m. UTC

The Securities and Exchange Commission (SEC) has said digital security exchanges that ensure assets on their books are legitimate in origin can continue to operate unhindered.

  • In a letter to a senior executive at the Financial Industry Regulatory Authority (FINRA), Wall Street's self-regulatory body, the SEC's trading and markets division said exchanges that go to lengths to comply with existing regulation will not face sanctions.
  • As well as conforming to federal securities law, the SEC, which has jurisdiction over FINRA, said such entities will need to introduce procedures that assess if listed digital securities have been sold legitimately throughout their lifetimes.
  • This includes checking the initial offering was either properly registered or came under a valid exemption, as well as ensuring secondary market transactions are also compliant.
  • The SEC's clampdown on initial coin offerings (ICOs) means it is often characterized as the industry's boogeyman.
  • But as the tokenized version of an already heavily regulated asset class, digital security offerings already largely comply with federal law.
  • Thus, issuers have already used some of the exemptions allowing them to host a sale without first registering as a public company.
  • Indeed, in recent months, the SEC has made steps to better accommodate these sorts of offerings. It published a proposal in March to increase the amount startups can raise under an SEC exemption.
  • In the summer, an SEC-registered broker-dealer unveiled plans to launch the first security token platform that can also be used to host compliant offerings.
  • FINRA itself has made tentative moves to move forward with the security token industry and just this month approved tZERO's plans to launch a retail-focused broker-dealer.
  • As the crusade against unregulated ICOs fades, U.S. regulators, the SEC in particular, may well be preparing the ground for a host of compliant digital security offerings.

Read the letter in full here:

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