Published by Herskovits PLLC

FINRA Regulatory Notice Encourages Members to Disclose Participation in Any Cryptocurrency-related Activities

FINRA Regulatory Notice Encourages Members to Disclose Participation in Any Cryptocurrency-related Activities

FINRA has announced it will increase its scrutiny of the cryptocurrency market. As several regulatory bodies endeavor to establish their jurisdiction over the crypto space, FINRA will now boost its oversight of registered firms’ participation in its burgeoning market. 

In a new regulatory notice, the self-regulatory organization asked its 3,700 member firms to notify it if they trade in cryptocurrency, accept cryptocurrency from clients, manage crypto funds, participate in the sale of digital tokens, or even offer advice relating to cryptocurrency. 

FINRA will also monitor virtual currency mining and any other related use of blockchain technology. 

According to the notice, 

"Until July 31, 2019, each firm is encouraged to keep its Regulatory Coordinator updated if it... begins or intends to begin, engaging in a new type of activity relating to digital assets not previously disclosed."

FINRA has made it clear that it will focus on any involvement in activities connected to digital assets, by both registered firm employees and any of their affiliates. 

Firms that are planning to engage in crypto-related activities must also inform the SRO, even if they haven’t yet begun to do so.

FINRA's Focus Points

According to the text of the notice, issued on July 6, “The types of activities of interest to FINRA if undertaken (or planned) by a member, its associated persons or affiliates, 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 (e.g., futures, options) tied to digital assets;
  • Participation in an initial or secondary offering of digital assets (e.g., 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 (e.g., bitcoin) 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; or
  • Recording cryptocurrencies and other virtual coins and tokens using distributed ledger technology or any other use of blockchain technology.”

Cryptocurrency Fraud Prevention and Retail Investor Protection

As the SEC targeted multiple cryptocurrency scams designed to defraud retail investors with the promise of get-rich-quick ICOs and digital tokens that were never actually developed, FINRA is clearly stepping up its oversight of the crypto space in the interest of inadvertent investors.

Firms that fail to disclose crypto-related activities may be at a disadvantage when facing disciplinary action by FINRA, though the notice is not mandatory and, consequently, does not discuss any aspects of enforcement. 

If a firm has already notified FINRA about its involvement in digital asset dealings, it need not re-submit the same information.

FINRA said the notice stems from its concern about "fraud and other securities law violations involving digital assets." 

Its contents are in line with the self-regulatory organization’s 2017 warning to investors, issued as a response to several pump-and-dump schemes involving ICOs coming to light.

Securities lawyer Rob Herskovits, founder of New York based Herskovits PLLC, advises and defends securities industry firms and individuals relating to potential or actual regulatory enforcement action.  Connect with Rob

Related topics: FINRA rulings (43)


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