During its earnings call on May 10, 2023, OTC Markets Group Inc. (OTC Markets) announced that it received approval from FINRA to offer services for digital assets as securities, signifying a significant milestone in establishing a regulated market for large-scale investors to engage in crypto security trading.
OTC Markets, in its quarterly report, highlighted the revision made to its membership agreement to facilitate transactions involving digital securities. This update enables OTC Link subscribers to quote and trade digital asset securities through the OTC Link ATS. It’s worth noting, however, that it remains premature to assess the potential material impact of such activities on OTC Link’s financial outcomes.
Similar to traditional exchanges, an Alternative Trading System (ATS) functions as a regulated trading platform. While numerous ATS platforms exist, the majority operate within the private securities market. OTC Markets, on the other hand, hosts a trading platform for a wide range of public securities, including small banks, global firms, and Grayscale funds that hold assets such as Bitcoin and Ethereum. R. Cromwell Coulson, President and CEO of OTC Markets, commented on this development, stating:
“We also recently received FINRA approval to permit digital asset securities to be traded by broker-dealers on OTC Link ATS. This approval furthers our mission of operating regulated markets for broker-dealers and issuers of securities. While it will be some time until the regulatory framework and infrastructure develop, we believe our markets are well-positioned to be part of new trading, data, and disclosure solutions for these securities.”
This is an important step forward because SEC Chair Gary Gensler has consistently maintained that all cryptocurrencies should be classified as securities. While this topic is hotly debated in the cryptocurrency industry, if Gensler’s stance is ultimately proven correct, OTC Markets stands well-positioned to provide liquidity for these assets in the future.
OTC Markets demonstrates a preference for a regulatory-driven approach as it strives to offer digital security trading services to its clientele. Cass Sanford, OTC Markets’ Deputy General Counsel, emphasizes the significance of transparent disclosure for investor protection.
Sanford indicates that, if digital assets are, in fact, securities, they would be considered over-the-counter equity securities. She pointed to Rule 15c2-11 for non-reporting firms, which could provide a path for appropriate disclosure. She further explains that numerous instruments presently resemble OTC securities, stating:
“The world’s largest digital asset investment vehicles trade on our markets. These securitized products help investors gain exposure to digital assets through broker-dealers and investment advisors operating within a robust framework of state and federal securities laws. We also recently received FINRA approval to permit digital asset securities to be traded by broker-dealers on our Alternative Trading System (ATS).”
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