SEC and FINRA Share Outstanding Issues with Crypto Custodians

The United States Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) have issued a joint statement on July 8th, in which they outlined regulatory compliance issues for cryptocurrency custodians.

Both agencies believe that there are a number of questions they need to address before they can approve crypto companies’ applications to become broker-dealers.

The statement outlined important criteria for both institutions’ approach to broker-dealer regulation, investor protection including when assets are deemed as securities under the 1970 Securities Investor Protection Act (SIPA), as well as various factors related to many of these questions such as when to consider approving a broker-dealer application of crypto-related companies.

The statement reads:

“The requirements of the Customer Protection Rule have produced a nearly 50-year track record of recovery for investors when their broker-dealers have failed. […] This record of protecting customer assets held in custody by broker-dealers stands in contrast to recent reports of cybertheft, and underscores the need to ensure broker-dealers robust protection of customer assets, including [cryptocurrency] securities.”

Broker-dealers in the U.S. are registered and regulated to buy and sell securities for themselves or their clients. And some firms use digital assets such as securities, thus allowing them to cater to institutional investors that cannot hold or directly buy assets.

“Put simply, the Customer Protection Rule requires broker-dealers to safeguard customer assets and to keep customer assets separate from the firm’s assets, thus increasing the likelihood that customers’ securities and cash can be returned to them in the event of the broker-dealer’s failure,” notes the report.

Apparently, the agencies claim that a crypto custody service may not be able to sufficiently prove that it actually controls the assets it supposedly holds. For instance, although a broker can verify that it has private keys to a crypto wallet, the challenge is to prove that no other individuals or institutions hold a copy of the private key, which could allow them to transfer digital asset security without obtaining permission from the broker-dealer.

In addition to that, if the transaction is made successfully, the custodian has no power to reverse it. This is applicable to all transactions a custodian wants to cancel or reverse.

Apart from custodial services, the regulators have suggested in the statement that they consider over-the-counter (OTC) trading, where brokers do not have custody of the digital asset securities, as lower-risk. This would mean such OTC trading would not require high levels of scrutiny. The report further tackles issues such as non-custodial service registration, bookkeeping policies, and liquidation following SIPA’s protocol.

Meanwhile, the SEC requested feedback back in March on how it might regulate crypto settlements. The agency showed further interest in the role of custodians in non-delivery versus payment trading as well as what safeguards are currently in place.

Coinsquare Enters the ATM Market with Just Cash Acquisition

Canadian-based cryptocurrency exchange platform Coinsquare has announced the acquisition of a controlling stake in the United States-based Fintech startup Just Cash, according to a press release.

The acquisition was aimed to get ahold of the proprietary software developed by Just Cash, whose tech enables traditional ATMs to sell cryptocurrency, with no hardware installations or modifications required. In addition to that, there are no additional costs to the operator.

Following this acquisition, Coinsquare will now be able to offer users the chance to utilize their debit cards on ATMs to make digital currency transactions.

The technology works similarly to any other debit card transaction. After the consumer inserts their debit card into the ATM, they are given the option to withdraw cash or to purchase one of several cryptocurrencies, including BTC. Upon approval of the transaction, the ATM prints out a receipt with a public key, a private key, and a QR code.

Coinsquare CEO Cole Diamond believes crypto-friendly ATMs are key to making digital assets accessible to the masses. He claims there is a lack of mainstream cryptocurrency assimilation at the moment due to the fact that many are intimidated by the process needed to acquire it.

“By using the millions of existing ATMs around the world, we can now bridge the gap and give new users the easiest and most familiar experience to purchase cryptocurrency. Bitcoin is new and unfamiliar to many, but ATMs are not. By tapping into the existing global ATM network, cryptocurrency can finally reach the masses. We are bringing that familiar and trusted process into the cryptocurrency world, and vice versa, for the first time.”

He further stated that the company is hoping to license its software to the millions of ATMs around the world.

The exchange platform stated that it plans to launch the service globally, starting with the U.S. The company claims it has partnered with three major producers of non-bank ATMs – which remain undisclosed. There are approximately 250,000 non-bank ATMs that can be potentially upgraded with this feature. Coinsquare believes this will open the doors to installing the service on some 170,000 machines, or half of all the non-bank ATMs across the US by the end of next year.

“We will outnumber the total number bitcoin ATMs within a year,” Diamond said.

CEO Diamond further claimed that this feature will bridge the gap between traditional banking and the crypto industry; however he does not expect to integrate the software with bank partners anytime soon.

Meanwhile, Just Cash will continue to operate independently under the Coinsquare. The news follows reports that Vancouver is considering a ban of Bitcoin ATMs due to their ties with money laundering. Earlier this year, Coinsquare announced the launch of its own stablecoin – eCAD – pegged to the Canadian dollar.

UK Financial Watchdog Proposes Ban on Crypto Derivatives

U.K.’s financial watchdog, the Financial Conduct Authority (FCA), has announced its rule proposal to ban the sale of cryptocurrency derivatives and exchange-traded notes (ETNs) to retail investors.

In a press release the Financial Conduct Authority (FCA) said it is consulting over an outright ban on the sale, marketing and distribution to all retail consumers of derivatives such as CFDs, options and futures, as well as exchange-traded notes (ETNs) linked to unregulated cryptoassets by firms operating or based in the U.K.

The FCA stated that financial products are “ill-suited” to retail investors due to the volatile nature of the underlying assets and the lack of reliable valuation possibilities. Furthermore, the inherent risk of cybertheft is also prevalent in cryptocurrency markets.

While the FCA states that there is no clear need for derivative products, the authority estimates the potential benefit to retail consumers from banning these products to be in a range from £75 million to £234.3 million a year.

Christopher Woolard, Executive Director of Strategy & Competition at the FCA, said:

“As with our work on the wider CFD and binary options markets, we will act when we see poor products being sold to retail consumers. These are complex contracts built on top of complex assets.”

The initiative follows their public commitment within the UK Cryptoasset Taskforce Final Report, which was published in July 2018, and updated in October 2018. The FCA emphasized that the new rules will replace the final regulation of crypto-based contracts.

A plan to consult on a ban of cryptocurrency derivatives was previously announced by the FCA last November. Christopher Woolard said at the time that the watchdog has concerns that retail investors are being sold complex, volatile and often leveraged derivatives products based on cryptocurrencies with underlying market integrity issues.

On Monday, the FCA also announced in a policy document that it has finalized rules restricting the sale of CFDs and CFD-like options to retail clients. The rules include limiting leverage to 2:1 on CFDs that reference cryptocurrencies.

The FCA said that it also expects to publish its final “Guidance on Cryptoassets” later this year after a period reviewing which crypto assets fall in this category.

Upcoming Crypto Exchange ErisX Receives CFTC Approval for Bitcoin Futures

The U.S. Commodity Futures Trading Commission (CFTC) has granted upcoming cryptocurrency exchange ErisX a license approval to offer futures contracts.

ErisX – backed by U.S. brokerage TD Ameritrade – announced that the CFTC has granted a derivatives clearing organization (DCO) license, serving as a secondary approval on top of an existing designated contract market (DCM) license, which the exchange had already held.

“Under the DCO order, Eris will be authorized to provide clearing services for fully-collateralized virtual currency futures. Eris’ indirect parent company, Eris Exchange, LLC, is registered with the CFTC as a designated contract market,” reported a CFTC press release.

Following the announcement, the company can now launch crypto futures products under the authority of the U.S. regulator.

Although no definite timeline has been provided, the news further reports that it will launch its futures contracts later this year. The future contracts will be physically-settled, meaning customers receive real Bitcoin and not the cash equivalent. In addition to that, ErisX will also certify its futures contract market participant rules prior to launch.

CEO Thomas Chippas has stated that the company is unique because it divided the trading and settlement functions using traditional DCM (exchange) and DCO (clearing) models.

He further added that it reflected the structure that institutional investors expect from other asset classes and will help drive these markets toward greater relevance and accessibility.

Apart from its DCO approval, ErisX received no-action relief from the CFTC for certain aspects of its offering. Primarily, the CFTC Division of Clearing and Risk granted ErisX relief from aspects of Part 39 of the Code of Federal Regulations Title 17.

Companies apply for no-action relief when they believe their product can fit the spirit of the law, but not necessarily the letter. When no-action letters are granted, the applicants must adhere strictly to the list of requirements laid out within.

Meanwhile, ErisX’s approval comes a week after competitor LedgerX received its own DCM license. Likewise, LedgerX has yet to announce a definite timeline for the launch of its bitcoin futures contracts.

Other exchanges such Bakkt – subsidiary of NYSE parent firm ICE – and Seed CX, a US crypto derivatives provider, are planning as well launching their own physically-settled bitcoin futures soon. Bakkt is currently awaiting a trust company license from the New York Department of Financial Services.

Xetra Stock Exchange Lists Its First Blockchain Company

Xetra, a Deutsche Börse-operated stock exchange, has just listed its first blockchain company – the Berlin-based blockchain firm Advanced Blockchain AG. The news was reported by financial news site DGap on July 1st.

According to the official announcement, Advanced Blockchain AG’s shares are tradable on Xetra, starting July 1. Prior to this, the firm was listed on the Frankfurt Stock Exchange in January 2019, as well as on the primary market of the Düsseldorf stock exchange.

The report states that German financial services holding firm Lang & Schwarz facilitated the listing on Xetra as its designated sponsor and market maker.

“This additional trading venue will further facilitate the development of new investor groups, especially with an international background. Existing listings on the Dusseldorf Stock Exchange and the Frankfurt Stock Exchange will continue,” stated Advanced Blockchain AG.

According to DGap, Advanced Blockchain AG develops distributed ledger technology (DLT) software for businesses. Along with its subsidiary GmbH, the firm has built a project called peaq, which aims to provide a blockchain base layer for businesses.

It’s also developing a directed acyclic graph (DAG)-based blockchain called “DAGchain”. When completed, the DAGchain protocol is slated for use in a number of projects in industries such as IoT, automotive, financial and engineering.

The report further reads:

“The Xetra platform offers increased flexibility for seeing order depth within markets and offers trading in stocks, funds, bonds, warrants and commodities contracts.”

Based in Frankfurt am Main, Xetra is an all-electronic trading system launched in 1997 for use on the Frankfurt Stock Exchange. However, since then the system gradually expanded to be used by over 200 trading participants from 16 European countries, as well as Hong Kong and the United Arab Emirates.

According to Deutsche Börse, over 90% of share trading across German exchanges, and around 30% of trading in ETFs in Europe, is transacted through Xetra. Recent data shows that the exchange accounted for €131.4 billion ($149 billion) of Deutsche Börse’s total cash markets €146.0 billion ($165 billion) turnover in May 2019, with an average daily Xetra trading volume of €6 billion ($6.79 billion).

In a separate announcement, the company disclosed that it has signed a letter of intent with a German telecommunications provider and cable operator to develop a block-chain-based protocol for billing in Internet of Things (IoT) networks. The name of the telecom provider, however, has not been disclosed.

Meanwhile, DGap reports that their future collaboration will involve the peaq project and Advanced Blockchain AG’s proprietary protocol DAGchain, which uses an AI-powered decentralized consensus algorithm and incorporates proof-of-stake (PoS) elements.