In a Regulatory Notice published July 6, 2018, the Financial Industry Regulatory Authority (FINRA) encourages its members to promptly notify FINRA if they, or their associated persons or affiliates, engage in activities related to digital assets such as cryptocurrencies and other virtual coins and tokens. The Notice also encourages firms to inform FINRA of changes in the event the firm, or its associated persons or affiliates, intends to begin or in fact begins engaging in activities relating to digital assets not previously disclosed, on a continuing basis through July 31, 2019.
As a non-profit and non-governmental entity, authorized by the Congress and overseen by the Securities and Exchange Commission (SEC) to be the self-regulatory organization of the securities industry, FINRA oversees broker-dealers through a combination of rulemaking and disciplinary actions. FINRA has actively engaged with individual industry participants to monitor developments in the digital assets marketplace and has significant influence over the industry’s involvement in this marketplace. This Notice follows a 2018 Risk Control Assessment (RCA) Survey in which FINRA asked about firms’ involvement in activities related to digital assets.
The market for digital assets “has grown significantly and has increasingly been of interest to retail investors,” FINRA states in the Notice. “At the same time, investor protection concerns exist, including incidences of fraud and other securities law violations involving digital assets and the platforms on which they trade. As such, FINRA has a keen interest in remaining abreast of the extent of member involvement in this space.”
If a firm recently has notified FINRA in response to a direct request, has provided this information by way of the 2018 RCA Survey, or has submitted a continuing membership application (CMA) regarding its involvement in activities related to digital assets, FINRA does not request additional notification pursuant to this Notice unless a change has occurred.
For purposes of the Regulatory Notice, the term “digital asset” refers to cryptocurrencies and other virtual coins and tokens—including those offered in an initial coin offering (ICO) or pre-ICO—and any other asset that consists of, or is represented by, records in a blockchain or distributed ledger—including any securities, commodities, software, contracts, accounts, rights, intangible property, personal property, real estate, or other assets that are “tokenized,” “virtualized” or otherwise represented by records in a blockchain or distributed ledger. Digital assets that meet the definition of an “investment contract” under the Securities Act or Securities Exchange Act are “securities” governed by the federal securities laws and FINRA rules, irrespective of whether they are labeled as “securities.”
The types of activities of interest to FINRA include:
- Purchases, sales, or executions of transactions in digital assets;
- Purchases, sales, or executions of transactions in a pooled fund investing in digital assets;
- Creation of, management of, or provision of advisory services for a pooled fund related to digital assets;
- Purchases, sales, or executions of transactions in derivatives (such as futures and options) tied to digital assets;
- Participation in an initial or secondary offering of digital assets (ICO, pre-ICO);
- Creation or management of a platform for the secondary trading of digital assets;
- Custody or similar arrangement of digital assets;
- Acceptance of cryptocurrencies from customers;
- Mining of cryptocurrencies;
- Recommend, solicit, or accept orders in cryptocurrencies and other virtual coins and tokens;
- Display indications of interest or quotations in cryptocurrencies and other virtual coins and tokens;
- Provide or facilitate 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 joins a long list of federal and state regulatory agencies and self-regulatory organizations in getting involved in cryptocurrencies and crypto-assets. Whether this turns FINRA into a primary player in the emerging domain of cryptocurrency regulation by securities regulators and supervisors remains to be seen. But given the unique role that FINRA plays in the securities industry and, most specifically, on behalf of the SEC, increased engagement by the SEC can surely be expected to intensify the focus of FINRA in this space.