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Digital Securities Get Green Light for OTC Markets Trading: FINRA Approval Announced

As the wave of regulatory scrutiny from the SEC intensifies against the world of cryptocurrencies, including substantial legal actions against giants such as Binance, the world's leading crypto asset trading platform, and Coinbase, a trading platform valued in billions, an under-the-radar approval has been granted by FINRA to OTC Markets to offer trading services for digital securities.

OTC Markets proclaimed this approval in early May, but the wheels of the trading activity are not expected to start turning just yet. In line with this announcement, the CEO of OTC Markets, R. Cromwell Coulson, expressed:

"FINRA has recently given us the green light to allow broker-dealers to trade digital asset securities on OTC Link ATS. This consent strengthens our commitment to establishing regulated markets for broker-dealers and issuers of securities. It may be a while before the regulatory framework and infrastructure evolve, but we are optimistic that our markets are well-positioned to be integral to new trading, data, and disclosure solutions for these securities."

OTC Markets is evidently setting the stage to leverage the SEC's stance that all digital assets are securities, while not heavily investing in this course of action as the major players, Binance and Coinbase, brace for long-drawn, all-or-nothing legal battles. Both of these crypto behemoths have contracted high-profile law firms and made public declarations that they will counter the SEC with the aim of injecting much-needed clarity into the crypto space. It's worth noting that the Coinbase case doesn't include allegations of fraud, thereby potentially making them a formidable legal adversary to the SEC.

The lawsuit against Binance was lodged on June 5th, citing multiple securities law infringements, inclusive of fraud claims. Among other allegations, the SEC maintains that Binance surreptitiously permitted U.S. customers to trade on its non-U.S. platform, concealed shared control of the U.S.-based Binance.US, commingled customer assets, and misled investors about non-existent trading controls over the Binance.US platform.

In connection with broker-dealer registration violations, the SEC alleges that Binance and BAM Trading operated as unregistered national securities exchanges, broker-dealers, and clearing agencies, and that Binance's founder, Changpeng Zhao, acted as a control person in these operations.

Coinbase made the first move in April by suing the SEC, demanding regulatory transparency on crypto. In retaliation, the SEC launched a lawsuit against Coinbase on June 6th, accusing the company of operating its crypto asset trading platform as an unregistered national securities exchange, broker, and clearing agency.

The SEC's summary of its cause of action against Coinbase includes the company's facilitation of a marketplace for securities transactions, and acting as an intermediary in settling transactions in crypto asset securities by Coinbase customers.

The SEC argues that Coinbase's failure to register "has stripped investors of substantial protections, including SEC inspections, record-keeping requirements, and safeguards against conflicts of interest, among others." The absence of fraud claims in the Coinbase actions makes it, in my view, a crucial case to monitor for the crypto industry.

Meanwhile, OTC Markets has a window of opportunity to develop the necessary technology, controls, and procedures to facilitate liquidity to crypto assets in the future. OTC Markets does not plan to allow the trading of non-security digital assets, but should the SEC emerge victorious in the long haul, all digital assets in the U.S. will be deemed securities, and they will be prepared. In a related note, the ATS tZero, a platform licensed by SEC and FINRA, currently permits the trading of digital securities.

However, the hurdle of creating disclosures that satisfy the SEC's requirements is another matter entirely. As I discussed in a previous article in April, the SEC's intense scrutiny of any company with even the slightest involvement in crypto is such that it creates a challenging environment for progress.

In conclusion, the FINRA approval of OTC Markets is an interesting development in the ongoing saga of crypto regulation. It reflects an ongoing shift in the landscape and a potential stepping stone for future regulation and mainstream acceptance of digital securities. As the major players battle it out in court, the undercurrents of the industry continue to flow, and we can only wait and see how these developments will shape the future of cryptocurrency in the United States.