September 25, 2020 

Ms. Kris Dailey

Vice President, Risk Oversight & Operational Regulation

Financial Industry Regulatory Authority (“FINRA”)

One World Financial Center 

200 Liberty Street

New York, NY 10281 

Re: ATS Role in the Settlement of Digital Asset Security Trades

Dear Ms. Dailey:

Your staff has asked about the application of the Joint Staff Statement1 issued on 

July 8, 2019 by the staffs of the Division of Trading and Markets, U.S. Securities and 

Exchange Commission and the Office of General Counsel, Financial Industry Regulatory 

Authority (“FINRA”) to registered broker-dealers (“broker-dealer operator”) operating 

alternative trading systems (“ATSs”)2 that trade digital asset securities.3 

1 Division of Trading and Markets, U.S. Securities and Exchange Commission (“Commission”), 

and Office of General Counsel, FINRA, Joint Staff Statement on Broker-Dealer Custody of 

Digital Asset Securities, available at https://www.sec.gov/news/public-statement/joint-staffstatement-broker-dealer-custody-digital-asset-securities. The Joint Staff Statement represents staff 

views of the Division of Trading and Markets and FINRA. The Joint Staff Statement is not a rule, 

regulation, guidance, or statement of the Commission or FINRA, and the Commission and 

FINRA’s Board neither approved nor disapproved its content. The Joint Staff Statement does not 

alter or amend applicable law and has no legal force or effect.

2 An ATS is a trading system that meets the definition of an “exchange” under federal securities 

laws but is not required to register as a national securities exchange if the ATS complies with the 

conditions to the exemption provided under Rule 3a1-1(a)(2) of the Securities Exchange Act of 

1934 (“Exchange Act”). See 17 CFR 242.300(a) (defining an alternative trading system) and CFR 

242.3a1-1(a)(2) (the exemption from the definition of an exchange for an ATS). An ATS that is 

required to comply with Regulation ATS must register with the Commission as a broker-dealer. 

See 17 CFR 242.301(b)(1). 

3 For purposes of this no-action letter, the term “digital asset” refers to an asset that is issued and/or

transferred using distributed ledger or blockchain technology, including, but not limited to, socalled “virtual currencies,” “coins,” and “tokens.” A digital asset may or may not meet the 

definition of a “security” under the federal securities laws. For the purposes of this no-action 

letter, a digital asset that is not a security is referred to as a “non-security digital asset” and a 

digital asset that is a security is referred to as a “digital asset security.” 
I. Background

The Joint Staff Statement discussed staff views on, among other things, investor 

protection concerns related to a broker-dealer’s ability to comply with aspects of Rule 

15c3-34 under the Exchange Act with respect to digital asset securities. In particular, the 

Joint Staff Statement discussed paragraph (b) of Rule 15c3-3, under which the brokerdealer must obtain and maintain physical possession or control of all fully paid or excess 

margin securities carried by a broker-dealer for the account of customers,5 as well as the 

potential difficulties in complying with this provision due to the nature of digital asset 

securities. 

The Joint Staff Statement described several non-custodial activities involving 

digital asset securities, including where an ATS matches the orders of buyers and sellers 

of digital asset securities and the trades are either settled directly between the buyer and 

seller, or the buyer and seller give instructions to their respective custodians to settle the 

transactions. In either case, a broker-dealer operator does not guarantee or otherwise 

have responsibility for settling the trades and does not at any time exercise any level of 

control over the digital asset securities being sold or the cash being used to make the 

purchase (e.g., the ATS does not place a temporary hold on the seller’s wallet or on the 

buyer’s cash to ensure the transaction is completed). In effect, this non-custodial ATS 

model involves a four-step process: 

Step 1 - the buyer and seller send their respective orders to the ATS; 

Step 2 - the ATS matches the orders; 

Step 3 - the ATS notifies the buyer and seller of the matched trade; and 

Step 4 - the buyer and seller settle the transaction bilaterally, either directly with 

each other or by instructing their respective custodians to settle the transaction on 

their behalf. 

Since the issuance of the Joint Staff Statement, several broker-dealers seeking to 

operate an ATS that trades digital asset securities have asserted that the four-step process

described above increases operational and settlement risks. Instead, they prefer the 

following process (the “Three-Step Process”): 

Step 1 - the buyer and seller send their respective orders to the ATS, notify their 

respective custodians of their respective orders submitted to the ATS, and instruct 

their respective custodians to settle transactions in accordance with the terms of 

their orders when the ATS notifies the custodians of a match on the ATS; 

Step 2 - the ATS matches the orders; and 

4 See 17 C.F.R. 240.15c3-3.

5 See 17 CFR 240.15c3-3(b).

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Step 3 - the ATS notifies the buyer and seller and their respective custodians of 

the matched trade and the custodians carry out the conditional instructions. 

The custodians would then settle the trade on behalf of the buyer and seller based 

on the instructions received in Step 1. As with the four-step process, the broker-dealer 

operator does not guarantee or otherwise have responsibility for settling the trades and 

does not at any time exercise any level of control over the digital asset securities being 

sold or the cash being used to make the purchase (e.g., the ATS does not place a 

temporary hold on the seller’s wallet or on the buyer’s cash to ensure the transaction is 

completed) other than by notifying the custodians for the buyer and seller, and the buyer 

and seller, of the match. Broker-dealers seeking to operate an ATS assert that the 

primary benefit of the three-step settlement process is that it would reduce operational 

and settlement risk. 

Broker-dealers seeking to operate an ATS under the Three-Step Process have 

made additional statements regarding the terms of their respective operations to address 

concerns that they may be viewed as holding or controlling customer property. Brokerdealers seeking to operate an ATS trading digital asset securities have stated that: (1) the 

broker-dealer would maintain a minimum of $250,000 in net capital; (2) the agreements 

between the broker-dealer and its customers clearly state that the broker-dealer does not 

guarantee or otherwise have responsibility for settling the trades; (3) the broker-dealer 

would establish and maintain reasonably designed procedures to assess whether a digital 

asset security was offered and sold initially pursuant to an effective registration statement 

or an available exemption from registration, and whether any secondary transactions of 

the digital asset security on or through the ATS are made pursuant to an effective 

registration statement or an available exemption from registration; and (4) the 

transactions in digital asset securities otherwise comply with the federal securities laws. 

II. Response

Based on the facts and analysis set forth above, Division staff will not recommend 

enforcement action to the Commission under Section 15(c)(3) of the Exchange Act and 

Rule 15c3-3 thereunder if, under the circumstances listed below, a broker-dealer 

operating an ATS that trades digital asset securities uses the Three-Step Process 

described above:

(1) The broker-dealer operator maintains a minimum of $250,000 in net capital;

(2) The agreements between the broker-dealer operator and its customers clearly state

that the broker-dealer operator does not guarantee or otherwise have responsibility

for settling the trades;

(3) The broker-dealer operator has established and maintains reasonably designed

procedures to assess whether a digital asset security was offered and sold initially

pursuant to an effective registration statement or an available exemption from

registration, and whether any secondary transactions of the digital asset security

on or through the ATS are made pursuant to an effective registration statement or

an available exemption from registration; and

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(4) The transactions in digital asset securities otherwise comply with the federal

securities laws.

This position solely addresses an ATS trading digital asset securities under the

circumstances set forth in this letter and does not otherwise address broker-dealer custody 

or control of digital asset securities under Rule 15c3-3. The position of the staff is based 

strictly on the facts and circumstances discussed in your request, and any different facts 

or circumstances might require a different response. Furthermore, this response expresses 

the staff’s position regarding enforcement action only and does not purport to express any 

legal conclusions on the questions presented. The staff expresses no view with respect to 

any other questions that the proposed activities may raise, including the applicability of 

any other federal or state laws, or self-regulatory organization rules. This position is 

subject to modification or revocation by the staff at any time. 

If you have any questions, please call me at (202) 551-6573. 

Sincerely,

Elizabeth Baird

Deputy Director 

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