A New Kind of Investment Bank Powered by Ohanae
Published on June 09, 2021
Author : Greg Hauw, Founder, Chairman & CEO at Ohanae, Inc.

 

Ohanae is an integrated platform for special purpose broker-dealer to raise capital using digital asset securities and facilitate secondary trading with stablecoins for payments and settlement 24x7

"Digital asset" refers to an asset that is issued and/or transferred using distributed ledger or blockchain technology ("distributed ledger technology"), including, but not limited to, so-called "virtual currencies," "coins," and "tokens." The focus of this statement is digital assets that rely on cryptographic protocols.

"Digital asset security" means a digital asset that meets the definition of a "security" under the federal securities laws. A digital asset that is not a security is referred to herein as a "non-security digital asset."

Overview

On December 23, 2020, Security Exchange Commission issued the Statement with an intent to encourage innovation around the application of Rule 15c3-3 (the "Customer Protection Rule") to digital asset securities. The Statement sets forth a five-year temporary safe harbor for broker-dealers seeking to custody "digital asset securities" that becomes automatically effective on April 27, 2021. In addition, the Commission notes that any broker-dealer operating under the circumstances set forth in the Statement will not be subject to a Commission enforcement action for a period of five years from the publication of the Statement in the Federal Register.

The Statement requires a broker-dealer seeking to custody digital asset securities to limit its business to digital asset securities in order to isolate certain perceived risk. The Statement include requiring that the broker-dealer, among other things, assess a given digital asset security's distributed ledger technology and protect the private keys necessary to transfer the digital asset security.

The purpose of the Customer Protection Rule is to safeguard customer securities and funds held by a broker-dealer, to prevent investor loss or harm in the event of a broker-dealer's failure, and to enhance the Commission's ability to monitor and prevent unsound business practices. The Customer Protection Rule requires broker-dealers to safeguard customer assets, thus increasing the likelihood that customers' securities and cash can be returned to them in the event of the broker-dealer's failure.

The Statement provides an important road map for broker-dealers seeking to demonstrate that they have good control over digital asset securities they custody as required by the Customer Protection Rule set forth in Rule 15c3-3, especially as the method for maintaining control over digital asset securities.

Conditions for Broker-Dealers to Custody Digital Asset Securities

Although the Statement is neither a staff no-action letter nor an exemptive order of the SEC, the Statement represents an enforcement position — the SEC would not take enforcement action against a broker-dealer for violating SEC Rule 15c3-3(b)(1) with respect to the custodying of a customer’s digital asset securities if the broker-dealer complies with each of the following conditions:

1. The broker-dealer has "access" to the digital asset securities and the capability to transfer them on a particular blockchain.

2. Exclusive business in digital asset securities – the broker-dealer limits its business to dealing in, effecting transactions in, maintaining custody of, and/or operating an ATS for digital asset securities.

3. The broker-dealer establishes, maintains, and enforces reasonably designed written policies and procedures to conduct and document an analysis of whether a particular digital asset is a security offered and sold pursuant to an effective registration statement under the Securities Act or an available exemption from such registration, and whether the broker-dealer meets its requirements to comply with the federal securities laws with respect to effecting transactions in the digital asset security, before undertaking to effect transactions in and maintain custody of the digital asset security.

4. The broker-dealer establishes, maintains, and enforces reasonably designed written policies and procedures to conduct and document an assessment of the characteristics of a digital asset security’s distributed ledger technology and associated network prior to undertaking to maintain custody of the digital asset security and at reasonable intervals thereafter.

5. No known risks. The broker-dealer does not undertake to maintain custody of a digital asset security if the firm is aware of any “material security or operational problems or weaknesses” with the distributed ledger technology and associated network used to access and transfer the digital asset security or is aware of “other material risks posed to the broker-dealer’s business by the digital asset security.”

6. Private key protection. The broker-dealer establishes, maintains, and enforces reasonably designed written policies, procedures, and controls consistent with “industry best practices” to demonstrate that the broker-dealer has “exclusive control” over the digital asset securities it holds in custody and to protect against the theft, loss, and unauthorized and accidental use of the private keys necessary to access and transfer the digital asset securities that the broker-dealer holds in custody.

7. The broker-dealer establishes, maintains, and enforces reasonably designed written policies, procedures, and arrangements to

A. specifically identify, in advance, the steps it will take in the wake of certain events that could affect the firm’s custody of the digital asset securities, including, without limitation, blockchain malfunctions, 51% attacks, hard forks, or airdrops;

B. allow for the broker-dealer to comply with a court-ordered freeze or seizure; and

C. allow for the transfer of the digital asset securities held by the broker-dealer to another special purpose broker-dealer that is subject to the Statement, a trustee, receiver, liquidator, or person performing a similar function, or to “another appropriate person,” in the event the broker-dealer can no longer continue as a going concern and self-liquidates or is subject to a formal bankruptcy, receivership, liquidation, or similar proceeding.

D. the broker-dealer provides written disclosures to prospective customers

i. that the firm is deeming itself to be in possession or control of digital asset securities held for the customer for the purposes of paragraph (b)(1) of Rule 15c3-3 based on its compliance with the Statement and

ii. about the risks of investing in or holding digital asset securities that, at a minimum,

  • prominently disclose that digital asset securities may not be “securities” as defined in SIPA — and in particular, digital asset securities that are “investment contracts” under the Howey test but are not registered with the SEC are excluded from SIPA’s definition of “securities” — and thus the protections afforded to securities customers under SIPA may not apply;
  • describe the risks of fraud, manipulation, theft, and loss associated with digital asset securities;
  • describe the risks relating to valuation, price volatility, and liquidity associated with digital asset securities; and
  • describe, at a high level that would not compromise any security protocols, the processes, software and hardware systems, and any other formats or systems used by the broker-dealer to create, store, or use the broker-dealer’s private keys and protect them from loss, theft, or unauthorized or accidental use.

8. Written customer agreement. The broker-dealer enters into a written agreement with each customer that sets forth the terms and conditions with respect to receiving, purchasing, holding, safekeeping, selling, transferring, exchanging, custodying, liquidating, and otherwise transacting in digital asset securities on behalf of the customer.

For each of the requirements above, the Statement provides guidance as to what specific considerations the broker-dealer’s policies, procedures, and controls should address. However, some of these conditions are not unique to providing custody of digital asset securities, as any broker-dealer supporting initial issuance, secondary trading, and/or operating an alternative trading system for digital asset securities should already have some of these compliance and operations procedures in place. 

Ohanae Platform with Integrated Customer Protection

There are over three thousand broker-dealers in the United States, only a handful is qualified to becoming a special purpose broker-dealer for digital asset securities.

Ohanae Securities, a wholly-owned subsidiary of Ohanae is seeking to take advantage of the relief proposed in the Statement. [17 CFR Part 240 (Release No. 34-90788; File No. S7-25-20) Custody of Digital Asset Securities by Special Purpose Broker-Dealers]

Ohanae Securities (CRD#: 304656/SEC#: 8-70389) is a broker-dealers performing the full set of broker-dealer functions with respect to digital asset securities – including maintaining custody of these assets – in a manner that addresses the unique attributes of digital asset securities and minimizes risk to investors and other market participants. Ohanae Securities is limiting its business to digital asset securities to isolate risk and having policies and procedures to, among other things, assess a given digital asset security’s distributed ledger technology and protect the private keys necessary to transfer the digital asset security.

SEC Rule 15c3-3 is designed principally to protect customers of a registered broker-dealer from losses and delays in accessing their securities and cash that can occur if the firm fails. The rule requires the broker-dealer to safeguard customer securities and cash entrusted to the firm. If the broker-dealer fails, customer securities and cash should be readily available to be returned to customers. In the event the broker-dealer were to be liquidated under SIPA, the SIPA trustee would be expected to step into the shoes of the broker-dealer and expected to be able to transfer, sell, or otherwise dispose of assets in accordance with SIPA.

Ohanae’s vision is to create new, better ways for companies to raise capital, particularly through the issuance of equity in tokenized form (“Equity Tokens” or "Digital Asset Securities"), as well provide a means for investors to invest in and trade tokenized equity securities. One of the main intended uses of the Ohanae Platform is to provide the technological means and infrastructure for companies that raise capital to issue equity in digital, tokenized form on the Ohana Blockchain (as defined below). The Ohanae Platform is also intended to be capable of tokenizing existing equity securities that have been already issued in traditional, non-tokenized form.

The Ohanae Platform is intended to allow issuers to manage the capital raise process from investor log in and Equity Token creation to capital received and cap table management. Initially, the Ohanae Platform’s capitalization table management system is expected to support tokenized common stock, preferred stock and warrants. In the future, Ohanae intends to expand the Ohanae Platform’s capabilities to also support options and other types of securities.

Ohanae believes that the Ohanae Platform could make it easier for companies to issue Equity Tokens in compliance with the established rules and regulations that govern the U.S. financial markets, including the Jumpstart Our Business Startups Act, the Securities Act, the Securities Exchange Act of 1934 (the “Exchange Act”), various SEC and FINRA regulations and requirements and other applicable federal and state securities laws rules and regulations. Initially, the Ohanae Platform will be made available to issuers and investors based in the United States. Ohanae also intends to identify additional jurisdictions in accordance with issuer demand and expand the availability of the Ohanae Platform to issuers and investors located in other major jurisdictions as quickly as possible, subject to having available resources to do so, obtaining all required regulatory approvals needed in such jurisdictions and complying with applicable domestic and foreign securities laws and regulations in such jurisdictions.