A Legal Perspective on How Crypto Asset Trading Platforms Work

BACKGROUND

II. BACKGROUND ON CRYPTO ASSETS AND CRYPTO TRADING PLATFORMS

D. Crypto Asset Trading Platforms

71. Crypto asset trading platforms—like the Binance Platforms, which are described in more detail below—are marketplaces that generally offer a variety of services relating to crypto assets, often including brokerage, trading, and settlement services.

72. Crypto asset trading platforms allow their customers to purchase and sell crypto assets for fiat currency (legal tender issued by a country) or for other crypto assets. “Off-chain” transactions are tracked in the internal recordkeeping mechanisms of the platform but do not involve transferring crypto assets from one wallet to another, while “on-chain” transactions are those involving the transfer of a crypto asset from one blockchain address to another.

73. Crypto asset trading platforms typically possess and control the crypto assets deposited and/or traded by their customers and thus function as a central depository. The customers’ entitlements are then typically tracked and maintained on the crypto asset trading platform’s internal ledgers. Consistent with their failures to register with the SEC in any capacity and follow rules applicable to registered intermediaries, the Binance Platforms did not segregate a customer’s crypto assets from other customers’ or the firm’s assets.

74. The graphic user interfaces employed by crypto asset trading platforms—such as on websites, mobile apps, or other software—typically emulate and function like traditional securities trading screens: They show order books of the various assets available to trade and historical trading information like high and low prices, trading volumes, and capitalizations.

75. However, unlike in traditional securities markets, crypto asset trading platforms (including the Binance Platforms) typically solicit, accept, and handle customer orders for securities; allow for the interaction and intermediation of multiple bids and offers resulting in purchases and sales; act as an intermediary in making payments or deliveries, or both; and maintain a central securities depository for the settlement of securities transactions.

76. By contrast, a registered national securities exchange submits information regarding executed trades to a registered clearing agency that takes responsibility for ensuring settlement finality and safekeeping of the assets being traded and, in doing so, protects investors’ interests. Thus, registered national securities exchanges typically do not assume possession or control of the underlying assets being traded. Moreover, crypto asset trading platforms usually settle transactions by updating internal records with each investor’s positions, a function typically carried out by clearing agencies in compliant securities markets.

77. Likewise, crypto asset trading platforms typically perform roles traditionally assigned to broker-dealers in regulatory compliant securities markets, without following or even recognizing the legal obligations and restrictions on activities that accompany status as a broker-dealer. For example, unregistered and non-compliant crypto asset trading platforms often do not adequately disclose that they have the ability and financial incentive to trade crypto asset securities against their own customers on the platform, putting customers on the losing side of each trade.