FINRA urged firms to notify their FINRA Regulatory Coordinators in writing if they, or their associated persons or affiliates, are currently engaging in or intend to engage in activities related to cryptocurrencies, virtual coins and tokens (including those offered in an Initial Coin Offering ("ICO")), and other digital assets (including digital assets that are non-securities).
In Regulatory Notice 18-20, FINRA affirmed its commitment to monitoring the digital assets marketplace and protecting retail investors from fraud and other securities laws violations relating to cryptocurrencies. The Notice is applicable through July 31, 2019. The scope of activities for which FINRA is requesting disclosures is wide-ranging and includes, among other things, activities related to:
- purchases, sales or executions of transactions in (i) digital assets, (ii) pooled funds investing in digital assets and (iii) derivatives (e.g., futures, options) tied to digital assets;
- "participation in an initial or secondary offering of digital assets (e.g., ICO, or pre-ICO)";
- "creation or management of a platform for the secondary trading of digital assets";
- "acceptance [or management] of cryptocurrencies (e.g., bitcoin) from customers";
- "mining of cryptocurrencies";
- "provid[ing] or facilitat[ing] clearance and settlement services for cryptocurrencies and other virtual coins and tokens"; and
- "recording cryptocurrencies and other virtual coins and tokens using distributed ledger technology or any other use of blockchain technology."
FINRA also reminded firms that a material change in business operations requires the submission and approval of a continuing membership application ("CMA"). However, if a firm already submitted a CMA regarding its involvement in activities related to digital assets, or provided notification to its Regulatory Coordinator in response to a direct request or by way of the 2018 Risk Control Assessment (RCA) Survey, FINRA is not requesting additional notice unless a change has occurred.
Commentary / Joseph V. Moreno
While FINRA has not issued new rules relating specifically to digital assets, this request for information follows on the heels of FINRA's 2018 RCA Survey, which sought feedback on member firms' business activities relating to cryptocurrency, and its December 2017 Investor Alert which warned about cryptocurrency stock scams. It is clear that, similar to various U.S. regulators, FINRA views ICOs and cryptocurrency exchange platforms with a healthy dose of skepticism, citing various fraud cases and investor alerts issued by the SEC in the past few years. It is only a matter of time before these information requests are even more pointed, and FINRA's role in overseeing member firms' that engage in cryptocurrency transactions becomes more aggressive.
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