FINRA Will Continue to Monitor the Crypto Activities of Broker-Dealers

Neil Dennis

A U.S. regulatory initiative to monitor the cryptocurrency-related activities of the country's brokerages that was due to end this month has been extended for another year.

Last July, the Financial Industry Regulatory Authority (FINRA), a self-regulatory body for U.S. broker-dealers, issued Regulatory Notice 18-20 requesting its members to inform their "regulatory co-ordinators" if they or any affiliates or associated persons engaged, or intended to engage in activities related to digital assets.

The regulator asked firms to continue reporting such activities until July 31, 2019, but late last week FINRA issued Regulatory Notice 19-24 requesting members to continue to report such activities until July 31, 2020 - extending the initiative for another year.

Activities That Must be Reported

The types of activity of interest to FINRA include, but are not limited to:

  • 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 etc)
  • Creation or management of a platform for the secondary trading of digital assets
  • Custody or similar arrangement of digital assets
  • Acceptance of cryptocurrencies such as bitcoin from customers
  • Cryptocurrency mining
  • 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
  • Recording cryptocurrencies and other virtual coins and tokens using distributed ledger technology or any other use of blockchain technology

Initiative Extended

In its initial Regulatory Notice 18-20, FINRA noted that the market for digital assets had grown significantly and was becoming increasingly attractive to retail customers. It added that investor protection concerns exist, and therefore it had a keen interest in the extent of member involvement in cryptoassets.

Firms that engage or begin to engage in such activities are reminded to consider all applicable federal and state laws, rules and regulations, including FINRA and SEC rules and regulations.

On July 8, the U.S. Securities and Exchange Commission issued a joint statement with FINRA regarding the digital asset activities of broker-dealers. It outlined that such firms must ensure that their crypto activities comply with its Customer Protection Rule that protects investors from losses and delays in accessing their funds should the firm fail.

The statement said:

The manner in which digital asset securities are issued, held, and transferred may create greater risk that a broker-dealer maintaining custody of them could be victimized by fraud or theft. Consequently, a broker-dealer must consider how it can hold in possession or control digital asset securities [in compliance with the Customer Protection Rule].