SEC security token enforcement holiday
Cryptocurrencies,  Regulation,  Ripple,  XRP

SEC offers security token broker-dealers a five-year enforcement holiday

The first step in providing long-awaited regulatory clarity for security token sales comes as the agency drops the hammer on Ripple for selling the XRP, which it claims is an unregistered security

At the same time that the Securities and Exchange Commission is trying to kill Ripple for selling XRP, the agency threw the industry a bone, giving broker-dealers who provide digital asset custody services a five-year pass on enforcement actions.

Saying that it “recognizes that the market for digital asset securities is still new and rapidly evolving,” the agency noted that the enforcement holiday is specifically for digital assets— or security tokens—that qualify as securities regulated by the SEC.

“The technical requirements for transacting and custodying digital asset securities are different from those involving traditional securities,” the SEC acknowledged in a Dec. 23 statement. It added:

“The Commission supports innovation in the digital asset securities market to develop its infrastructure.”

The comment comes as Ripple has been shouting from the rooftops that the SEC is killing innovation after the agency sued it for selling unregistered securities.

The SEC’s lawsuit against Ripple asserting that XRP is a security has caused several exchanges to delist the cryptocurrency—in large part because they are not broker-dealers, well-known crypto attorney Steven Palley said on Twitter on Dec. 22.

So, while the timing is likely more about the impending change in leadership at the SEC, the agency is making it easier for licensed broker-dealers to sell digital asset securities—cryptocurrencies—just as it launches a high-profile lawsuit charging a company with illegally selling what it claims are unregistered securities. 

A step forward

The crypto industry has long sought a clear answer as to who can trade in security tokens and what the rules they must follow are. The SEC’s enforcement hiatus comes two weeks after Rep. Tom Emmer and five other members of congress asked the SEC to issue clear rules.

That lack of guidance, Rep. Emmer said, “threatens to stymie the progress of the digital security industry in the United States.”

The enforcement holiday does not mean there are no rules. SEC-registered broker-dealers will be required to limit their services to digital assets securities, as well as establish and follow risk-mitigation strategies, and disclose the risks unique to this type of cryptocurrency, the SEC said in a release.

One thing this includes is the reality that while traditional securities transactions can be reversed, that is often not true when dealing with this type of cryptocurrency. The risk of theft and loss of private keys is another.

Broker-dealers will also have to maintain physical control of the digital asset securities in custody.

SEC Commissioner Hester Peirce welcomed the new guidance, but called it “baby steps” in a Dec. 23 tweet.

Gabor Gurbacs, director of Digital Asset Strategy at the investment management firm VanEck, had a more expansive view of the enforcement hiatus. Replying to Peirce—known as Crypto Mom for her pro-crypto advocacy as a commissioner—he called it an “important step forward.”

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Leo Jakobson, Modern Consensus editor-in-chief, is a New York-based journalist who has traveled the world writing about incentive travel. He has also covered consumer and employee engagement, small business, the East Coast side of the Internet boom and bust, and New York City crime, nightlife, and politics. Disclosure: Jakobson has put some 401k money into Grayscale Bitcoin Trust.