FINRA Update on Crypto Asset Activities
On August 14, 2024, the Financial Industry Regulatory Authority (FINRA) issued an important update regarding its ongoing efforts to engage with its members on the subject of crypto asset activities. Referred to as "crypto assets," these are defined by FINRA as assets issued or transferred using distributed ledger or blockchain technology. These assets include virtual currencies, coins, and tokens, which may or may not meet the definition of "securities" under federal securities laws.
FINRA’s Engagement with Member Firms
For several years, FINRA has been working closely with its member firms to better understand their involvement in crypto asset-related activities. This engagement has included issuing multiple Regulatory Notices, such as FINRA Regulatory Notices 18-20, 19-24, 20-23, and 21-25. These notices encouraged member firms to inform FINRA if they, their associated persons, or affiliates engage in, or plan to engage in, any crypto asset-related activities. In 2023, FINRA furthered these efforts by sending a detailed crypto asset questionnaire to approximately 600 member firms.
The Update reveals that over one-third of the member firms involved in crypto asset activities are engaged in retail brokerage (36%), with significant participation in trading and execution (21%) and capital markets (20%). These firms perform a variety of activities including:
Acting as placement agents, wholesalers, or distributors for private placements of crypto assets or companies involved in crypto activities.
Operating alternative trading systems (ATS) to facilitate trading in crypto asset securities.
Facilitating customer crypto asset trading and custody services through affiliates or third parties.
Engaging in distributed ledger technology initiatives or test cases on permissioned blockchains.
Introducing institutional customers to third-party crypto asset custodians.
Providing crypto asset-related investment banking and advisory services.
Potential Rule Violations
FINRA has identified several potential violations related to crypto asset activities through its regulatory programs. These violations include:
Misrepresentations regarding the application of federal securities laws or FINRA rules to crypto activities (FINRA Rule 2210).
Failures in due diligence on crypto asset private placements and ineffective supervision of crypto activities (FINRA Rule 3110).
Inadequate disclosure of crypto asset-related outside business activities (OBAs) and private securities transactions (PSTs) (FINRA Rules 3270, 3280, and 3110).
Deficient AML programs that fail to detect and report suspicious crypto asset transactions (FINRA Rule 3310).
Failure to provide records related to crypto asset OBAs and PSTs (FINRA Rule 8210).
Standards of Commercial Honor and Principles of Trade violations (FINRA Rule 2010) due to the dissemination of promotional materials with material misstatements or omissions related to crypto asset businesses.
Market Surveillance and Compliance Risks
FINRA has also highlighted the potential for market abuse, including pump-and-dump schemes, in the equity markets involving crypto assets and blockchain technology. Such activities are of particular concern when they involve crypto asset securities traded on registered ATSs.
In its 2024 Annual Regulatory Oversight Report, FINRA further identified additional compliance risks and considerations related to crypto assets. This underscores the importance for FINRA member firms to continuously monitor and assess their crypto asset activities, as well as the adequacy of their compliance policies and supervisory procedures.
Conclusion
Given the evolving nature of crypto asset activities, FINRA member firms should expect ongoing scrutiny and updates from the regulatory body. Firms are encouraged to stay informed and ensure their compliance frameworks are robust enough to address the complexities associated with crypto assets.
At Anderson P.C., we specialize in advising financial professionals and firms on regulatory compliance and enforcement matters. If you have questions or need guidance on navigating FINRA’s complex regulatory landscape, please don’t hesitate to contact us.
Sources:
FINRA Regulatory Notices 18-20, 19-24, 20-23, 21-25.
FINRA 2024 Annual Regulatory Oversight Report.
FINRA Rulebook: Rules 2210, 3110, 3270, 3280, 3310, 8210, 2010.
* * *
Attorney Advertising—Anderson P.C. is a U.S. law firm located at 1717 K Street NW, Suite 900, Washington, D.C. 20006.
Anderson P.C. provides this information as a service to clients, prospective clients, and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers. If you have any questions, please contact Braeden Anderson.
