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SEC Confirms Legal Framework for Crypto Pairs Trading
The staff of the U.S. Securities and Exchange Commission’s Division of Trading and Markets has released detailed guidance clarifying how existing federal securities laws apply to cryptocurrency-related activities. The document provides a practical framework for broker-dealers, transfer agents, and trading platforms that engage with digital assets.
Rather than introducing new rules, the guidance explains how long-standing securities regulations intersect with crypto market practices, offering operational clarity for regulated firms.
Custody Rules Leave Flexibility for Broker-Dealers
A key section addresses the custody of digital assets. In 2020, the SEC issued a statement outlining a voluntary “safe harbor” approach for brokers that followed specific steps when holding crypto assets. The newly issued guidance confirms that this framework is not mandatory.
Broker-dealers may continue to custody crypto securities by complying with existing custody and financial responsibility rules. The staff also clarified that brokers may facilitate “in-kind” transactions, where a crypto asset is exchanged directly for an ETF share. However, if a broker records the crypto asset itself—such as Bitcoin or Ether—on its balance sheet, it must appropriately account for the associated risks.
Investor Protection Has Clear Limits
The guidance also highlights important distinctions related to customer protection. Insurance provided by the Securities Investor Protection Corporation (SIPC) applies only to securities registered with the SEC. If a crypto asset qualifies as an “investment contract” but remains unregistered, SIPC coverage does not apply.
To address this gap, brokers and customers may agree to classify non-security crypto assets as “financial assets” under commercial law. This classification can help ensure that, in the event of a broker’s insolvency, such assets are treated as customer property rather than as part of the firm’s general estate.
Federal Law Permits Crypto Pairs Trading
The document also examines trading mechanics on Alternative Trading Systems (ATS) and national securities exchanges. SEC staff confirmed that federal securities laws do not prohibit “pairs trading,” defined as exchanging a crypto security directly for a non-security crypto asset.
Overall, the guidance aims to reduce uncertainty by outlining how established securities laws already apply to digital asset activity, reinforcing regulatory expectations while allowing operational flexibility within existing legal frameworks.
