For ease of this article I’ll simply refer to the group as “Tokens”. The number one call that I get is from companies that want to sell their Tokens in the U.S markets. They want to buy a broker dealer along with an Alternative Trading System (ATS) and start immediately selling tens of millions of dollars of their Tokens. These Tokens, of course, are going to skyrocket in value and are the greatest things ever seen since the invention of the iPhone!!!
As much as I would like to accommodate these requests immediately, there are numerous regulatory hurdles to overcome such as receiving approval from FINRA and the SEC for a broker dealer license to sell Tokens. No, you cannot just simply buy a broker dealer or an ATS (as many have learned the hard way) and start selling Tokens to the public.
Here are some helpful tips on filing an application for Tokens with the regulatory bodies:
1. You will need a detailed business plan which describes the following:
a. What entities are the holders of the “private keys” in the DLT network that would be required to gain access to the cryptosecurities, cash-backed token holdings or digital currency? Are multiple keys needed to gain access or is a single key sufficient?
b. Who controls or has access to the DLT network where the assets are held?
c. What happens in the event of a loss or destruction of assets (either due to fraud or technological malfunction) on the network?
d. If the broker-dealer was to fail and is liquidated in a proceeding under the Securities Investor Protection Act of 1970, as amended, how would customers’ securities and funds be treated, and how would customers access their assets?
e. In instances where firms have established partnerships with other firms to serve as their back-ups and to carry out critical functions in the event of emergencies, what type of access would those back-up firms have to the private keys?
f. How will customers or the Securities Investor Protection Corporation (SIPC) trustee access the customers’ assets in the event of a defaulted broker-dealer? What parties will be involved, and what are their roles and responsibilities?
g. How does the use or application of the DLT network affect the market risk, liquidity or other characteristics of the asset?
h. How do the characteristics of a particular cryptosecurity, digital currency or other cash-backed token holdings fit within the principles of the net capital rule?
i. What information is maintained using the DLT network?
j. What will be deemed as the physical location of the firm’s records maintained on a node of a DLT network that may extend over multiple countries?
k. What parties have control or access to the firm’s records? What are their rights, obligations and responsibilities related to those records, and how are they governed?
l. What is the firm’s (and other participants’) level of access to the data, and in what format would it be able to view the data?
m. How does the DLT network interact with the firm’s own systems for recordkeeping purposes?
n. How would the records be made available to regulators?
o. How will the firm’s traditional exception reporting, used to supervise transactions, be generated from a DLT network?
p. How will the firm protect any required records from tampering, loss or damage?
q. Clearance & Settlement?
r. Anti-Money Laundering (AML) Procedures & Know Your Customer (KYC) Rules?
s. Customer Data and Privacy?
t. Trade & Order Reporting Requirements?
u. Supervision & Surveillance of Transactions?
v. Fees & Commissions?
w. Customer Confirmations & Account Statements?
x. Anticipated Customer Base?
y. Facilities?
z. Licensed & Qualified Staff
These are just some of the issues that will need to be addressed in a filing but as we have completed the alphabet, I’ll stop here.
Feel free to contact me with any questions:
Ken@Luxorbd.com
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