The Financial Regulatory Authority (“FINRA”) recently issued Regulatory Notice 18-20, which encouraged member firms to provide notification if either the broker-dealer or their associated persons or affiliates were engaging in, or planned to engage in, any activities related to digital assets such as cryptocurrencies and other virtual coins.
FINRA observed that the market for digital assets, such as cryptocurrencies and other virtual coins and tokens, has grown significantly and has increasingly been of interest to retail investors. At the same time, investor protection concerns are increasing based upon the increases in the incidences of fraud and other securities law violations involving digital assets and the platforms on which they trade. To that end, FINRA noted that it has a keen interest in remaining abreast of the extent of broker-dealer involvement in this space.
To supplement its efforts in this area, FINRA is requesting that each broker-dealer provide notification to FINRA if it, or its associated persons or affiliates, currently engages, or intends to engage, in activities related to digital assets, including digital assets that are non-securities. Additionally, with respect to the activities of associated persons in this space, FINRA is also interested in how FINRA Rule 3270 (Outside Business Activities of Registered Persons) and Rule 3280 (Private Securities Transactions of an Associated Person) is addressed with respect to those activities.
The types of activities of interest to FINRA if undertaken (or planned) by a broker-dealer, its associated persons or affiliates is very broad, and includes:
- 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;
- 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; or
- Provide or facilitate clearance and settlement services for cryptocurrencies and other virtual coins and tokens.
In addition to the items noted above, FINRA is also seeking information on the trading activities of broker-dealers in derivative products tied to digital assets, such as bitcoin futures products offered by the CME and CBOE Futures Exchange.
With the above in mind, until July 31, 2019, each broker-dealer is encouraged by FINRA to keep its Regulatory Coordinator updated if it, or its associated persons or affiliates, begins or intends to begin, engaging in a new type of activity relating to digital assets. With that said, it was also noted if a broker-dealer has provided this information by way of the 2018 Risk Control Assessment Survey performed earlier this year or has submitted a continuing membership application regarding its involvement in activities related to digital assets, FINRA does not request additional information unless a change has occurred.