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FINRA Approves OTC Markets To Trade Digital Securities

As the SEC continues its onslaught against the crypto industry, including the filing of high-profile actions against Binance, which operates the largest crypto asset trading platform in the world, and Coinbase, a multi-billion-dollar crypto trading platform, FINRA has quietly approved OTC Markets to provide trading services for digital asset securities.

OTC Markets announced the approval in early May but don’t expect any activity in the near future.  Concurrent with announcing the approval, OTC Markets CEO, R. Cromwell Coulson, stated:

We also recently received FINRA approval to permit digital asset securities to be traded by broker-dealers on OTC Link ATS. This approval furthers our mission of operating regulated markets for broker-dealers and issuers of securities. While it will be some time until the regulatory framework and infrastructure develop, we believe our markets are well-positioned to be part of new trading, data, and disclosure solutions for these securities.

OTC Markets is clearly putting itself in a position to capitalize on the SEC’s position that all digital assets are securities, while not expending too much capital on the process while big players Binance and Coinbase gear up for a protracted, winner take-all, litigation.  Both Binance and Coinbase have hired heavy hitter law firms and publicly announced that they will fight the SEC with the goal of providing much needed clarity to the crypto industry.  As discussed below, the Coinbase case does not include fraud allegations, making them the stronger legal opponent to the SEC.

The Binance suit was filed June 5th alleging numerous securities laws violations, including fraud claims.  Among others, the SEC claims that: (i) Binance secretly allowed U.S. customers to trade on its non-U.S. platform; (ii) hid common control of the U.S. based Binance.US; (iii) commingled customer assets; (iv) diverted customer assets to an entity controlled by Binance founder Changpeng Zhao; (v) misled investors about non-existent trading controls over the Binance.US platform; (vi) engaged in manipulative trading that artificially inflated the platform’s trading volume; and (vii) engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law.

Related to broker dealer registration violations, the SEC claims that:

  • Binance and BAM Trading with operating unregistered national securities exchanges, broker-dealers, and clearing agencies;
  • Binance and BAM Trading with the unregistered offer and sale of Binance’s own crypto assets, including a so-called exchange token, BNB, a so-called stablecoin, Binance USD (BUSD), certain crypto-lending products, and a staking-as-a-service program; and
  • Zhao as a control person for Binance’s and BAM Trading’s operation of unregistered national securities exchanges, broker-dealers, and clearing agencies.

Coinbase sent the first shot across the bow, filing a suit against the SEC in April demanding regulatory clarity on crypto.  The SEC in turn filed suit against Coinbase on June 6th, charging the company with operating its crypto asset trading platform as an unregistered national securities exchange, broker, and clearing agency. The SEC also charged Coinbase for failing to register the offer and sale of its crypto asset staking-as-a-service program.

In its press release announcing the suit, the SEC summarized its cause of action alleging that Coinbase:

  • Provides a marketplace and brings together the orders for securities of multiple buyers and sellers using established, non-discretionary methods under which such orders interact;
  • Engages in the business of effecting securities transactions for the accounts of Coinbase customers; and
  • Provides facilities for comparison of data respecting the terms of settlement of crypto asset securities transactions, serves as an intermediary in settling transactions in crypto asset securities by Coinbase customers, and acts as a securities depository.

The SEC continues that Coinbase’s failure to register “has deprived investors of significant protections, including inspection by the SEC, recordkeeping requirements, and safeguards against conflicts of interest, among others.”  The Coinbase actions do not include fraud claims, making it, in my opinion, the cases to watch for the crypto industry.

In the meantime, OTC Markets has time to establish the technology, controls and procedures, to provide liquidity to crypto assets in the future.  OTC Markets does not intend to allow for the trading of non-security digital assets, but if the SEC wins the long game, all digital assets in the U.S. will be considered securities and they will be ready.  As a sidenote, the ATS tZero, is an SEC and FINRA licensed platform currently allowing the trading in digital securities.

Providing disclosures that pass SEC muster is another question altogether.  As I wrote about in April, the SEC is scrutinizing any business with even a modicum of crypto focus to the point where it is almost impossible to move forward.  For more on that and a sample SEC comment letter taking a deep dive into crypto, see HERE.

For more background on the years long process and issues related to broker dealers and digital asset securities, including custody matters, see HERE.

The Author

Laura Anthony, Esq.

Founding Partner

Anthony L.G., PLLC

A Corporate Law Firm

LAnthony@AnthonyPLLC.com

Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC has served clients providing fast, personalized, cutting-edge legal service.  The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news.

Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including the American Red Cross for Palm Beach and Martin Counties, the Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others.

Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.

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