BOCA RATON, Fla. (JLN) — In a recent interview at the FIA’s International Futures Industry Conference, Katten attorneys Lance Zinman and Dan Davis shared their perspectives on the evolving landscape of cryptocurrency and regulatory changes in the financial industry. The future of trading firms may involve more consolidation and a greater number registering as broker-dealers, the two Katten attorneys said.
Market Consolidation and Regulatory Pressures
Zinman noted that larger firms are thriving, leveraging their sophisticated technology to expand into new asset classes. In contrast, smaller firms are focusing on their core competencies, facing challenges in expanding due to high barriers to entry. This has led to a trend of consolidation, with notable examples such as the GTS acquisition of HC Technologies and Geneva Trading’s sale of GX2 Systems to South Street.
SEC’s Shift on Trader-Dealer Distinction
Zinman highlighted the significant regulatory shift by the Securities and Exchange Commission (SEC) in distinguishing between traders and dealers. The new rule effectively requires many proprietary trading firms to register as dealers, a change that could lead to a significant increase in broker-dealer registrations.
The SEC’s recent rule effectively redefines the distinction between traders and dealers, overturning nearly 80 to 90 years of precedent, Zinman said. According to the new rule, if you are trading in a manner that provides liquidity to the market—whether by being active on both sides of the same market regularly, capturing the bid-ask spread, or using exchange programs for liquidity provision—you are now considered a dealer, he said.
Digital Asset Trading and ETFs
The discussion turned to digital asset trading, where the introduction of Bitcoin ETFs has driven renewed interest. Davis said that the inflows into these funds have been substantial, but the SEC’s cautious approach to approving new products may slow the pace of innovation.
“It’s a very active market. Obviously the big development over the past few months is the introduction of the Bitcoin ETF that has driven a renewed interest in Bitcoin, and I think digital assets in particular. Obviously the inflows into those funds have been enormous over the past few months,” Davis said.
Katten’s Successes in the Crypto Space
Davis reflected on Katten’s extensive experience in the crypto space, having helped prominent entities like LedgerX and ErisX obtain registration. The firm is currently representing Binance US in SEC litigation, in a case that will significantly influence the determination of whether secondary market transactions in digital assets are securities transactions or not.
“Katten’s been active in the crypto space for a long time. I started counting three years ago, but seven years ago when I just started as general counsel of the CFTC, my first meeting with someone outside of the CFTC about crypto was with Katten. I personally have Katten on my radar for quite a long time in the crypto space,” Davis said.
Regulatory Uncertainty and Market Surveillance
The attorneys emphasized the ongoing regulatory uncertainty in the crypto space, particularly regarding the SEC’s view that most digital assets are securities. The lack of clear guidance in recent settlement agreements, such as the case involving 79 digital assets, makes it challenging for practitioners to advise clients on what constitutes a security.
“There’s none of that in the settlement agreement. So all I know reading that document is that the SEC thinks that some of these unnamed 79 digital assets are securities,” Davis said.
