OTC Markets Approved by FINRA to Trade Digital Assets that are Securities

Earlier this week, during its earnings call, OTC Markets (OTC:OTCM) revealed that on May 5th, it had received FINRA approval to provide services for digital assets which are securities. In the May 9th earnings report, R. Cromwell Coulson, President and CEO of OTC Markets, 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.”

In the quarterly report, OTC Markets said the update to its membership agreement to facilitate transactions in digital securities may enable OTC Link subscribers to quote and trade digital asset securities via OTC Link ATS. However, it is not yet possible to determine whether such activity will occur or whether any such activity would have a material impact on OTC Link’s financial results.

In a follow-up statement by Cass Sanford, OTC Markets Deputy General Counsel, she said that proper disclosure is fundamental for investor protection, indicating OTC Markets is ready to step in and provide a market for digital securities. As the Securities and Exchange Commission (SEC) has long insisted that ALL digital assets, or crypto, are securities – if this statement is true – OTC will be well-positioned to provide liquidity for these assets at some point in the future.

Sanford explained:

“The world’s largest digital asset investment vehicles trade on our markets. These securitized products help investors gain exposure to digital assets through broker-dealers and investment advisors operating within a robust framework of state and federal securities laws.  We also recently received FINRA approval to permit digital asset securities to be traded by broker-dealers on our Alternative Trading System (ATS).”

An ATS is a regulated trading platform similar to an exchange – there are dozens today, but most operate in the private securities market. OTC Markets provides a trading platform for public securities, including many smaller banks and international firms, as well as Grayscale’s various funds that hold digital assets like Bitcoin (Grayscale Bitcoin Trust) or Ethereum (Grayscale Ethereum Trust).

Sanford said that if digital assets are, in fact, securities, they would be considered over-the-counter equity securities. She pointed to Rule 15c2-11 for non-reporting firms, which could be a path for appropriate disclosure. Currently, she believes that a lot of these instruments, when you look at the long tail, they already look like OTC securities.

Sanford said that while policymakers have been slow to craft specific regulations for digital assets, which could be securities or something else, many DeFi organizations or digital asset issuers claim to be outside traditional securities laws. This does not eliminate the need for public disclosure obligations. At that same time, public disclosure can build trust in the digital asset sector – a characteristic that has been pulverized due to the many failures and fraudulent offerings.

During Fintech Nexus this week in New York City, Sanford participated in a panel on crypto regulation where she discussed the recent FINRA approval – believed to be the first of its kind. Speaking with Sanford following her presentation, CI asked if OTC Markets would consider providing a market for digital assets which were not securities. Sanford said this was not in the cards today, but OTC Markets wants to be prepared to trade anything that can trade as a digital asset security.

We discussed the possibility that the Commission provides some sort of relief for digital asset issuers to move into being a registered security, thus allowing broker-dealers to trade in these securities.

“It is all about investor protection at the end of the day. An organization raises capital, and in exchange for that capital, you give them a token that is movable on the blockchain. An investor can then do something with that asset. You cannot forget about the capital raises that took place in 2017 and 2018 … You need to welcome them into the [regulated] space.”

She said that any asset that is willing to jump through the hoops of a regulated market is an opportunity for OTC Markets – like collectibles or perhaps other assets, but you must figure out how they fit into the existing framework.

Where is this all going? If blockchain solutions can create a more effective and efficient exchange of value, then absolutely that is where we are going, she explained. Traditional back offices can benefit from blockchain technology.

Sanford emphasized that the digital security market needs more disclosure, and they are getting proper licenses in place, setting up things correctly – ready to provide a needed service for digital security trading.

People want trusted solutions, said Sanford. Like OTC Markets.


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