As part of its regulatory mandate to safeguard investors and uphold market integrity, FINRA is addressing the evolving landscape of crypto asset activities conducted by its member firms. Crypto assets—commonly referred to as digital assets—encompass a range of items issued or transferred using blockchain technology. These include virtual currencies, coins, and tokens, which may or may not qualify as "securities" under federal laws.
FINRA's Approach to Crypto Assets
FINRA's Crypto Hub is a comprehensive initiative aimed at overseeing the crypto asset activities of member firms. The Hub coordinates efforts across FINRA departments to manage regulatory concerns related to these activities. Key components include:
- Crypto Asset Investigations (CAI): A team within Member Supervision that handles investigations and provides guidance on crypto assets, as well as shares industry insights and best practices.
- Crypto Asset Surveillance Team (CAST): This team within Market Regulation and Transparency Services focuses on market surveillance related to crypto assets and other associated products.
- Blockchain Lab (the Lab): Situated within the Office of Regulatory Economics and Market Analysis, this team develops regulatory initiatives and technology solutions to oversee crypto asset activities.
FINRA regulates its member firms and their associated persons, but not their affiliates or parent companies unless they are also member firms. Since 2018, FINRA has required member firms to notify their Risk Monitoring Analyst (RMA) about their engagement with crypto assets. In 2023, FINRA expanded this effort by distributing a crypto asset questionnaire to nearly 600 firms.
Insights from FINRA's Review
Based on the responses to the questionnaire and other regulatory data, FINRA has identified several themes concerning crypto asset activities among member firms:
- Active Engagement: Some firms are involved in various crypto asset activities such as private placements, alternative trading systems (ATSs), and custody services for crypto assets.
- Affiliations and Partnerships: Many firms have connections with crypto asset exchanges or intermediaries, either through direct ownership, partnerships, or other arrangements.
- Outside Business Activities (OBAs) and Private Securities Transactions (PSTs): FINRA has noted that some associated persons are engaged in activities like proprietary trading of crypto assets or operating investment funds related to crypto assets.
Observed Challenges
FINRA has identified potential regulatory challenges and compliance issues in the following areas:
- Communications with the Public: Potential violations of FINRA Rule 2210 related to misleading or incomplete representations about the protections applicable to crypto asset activities.
- Supervision and Due Diligence: Issues related to failures in due diligence for crypto asset private placements and supervision of associated activities.
- Anti-Money Laundering (AML) Compliance: Observations of inadequate AML programs for detecting and reporting suspicious transactions involving crypto assets.
- Disciplinary Actions: Instances of violations of various FINRA rules, including failures to disclose relevant information about crypto asset activities and non-compliance with record-keeping requirements.
Moving Forward
Member firms engaging in crypto asset activities should continue to review and enhance their compliance programs. This includes evaluating their supervisory controls, due diligence processes, and adherence to AML regulations.
For further information on compliance with these evolving requirements or to discuss the implications for your firm, please contact us. We are equipped to assist with navigating these complex regulatory challenges.
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