In a revealing guidance note released recently, the U.S. Financial Industry Regulatory Authority Inc. (FINRA) shed light on the expanding intersection between traditional brokerage firms and the cryptocurrency sector. The findings, based on extensive reviews and a survey of 600 firms, paint a picture of an industry increasingly entangled with digital assets, often in ways that challenge existing regulatory frameworks.
The Crypto Landscape in Brokerage Firms
FINRA’s investigation uncovered that nearly 400 U.S. brokerage firms are now involved in the crypto sector to varying degrees. This involvement ranges from active crypto businesses and planned ventures to partnerships with crypto firms. It also includes firms employing representatives engaged in crypto-related outside business activities or private securities transactions.
The scope of these activities is broad, encompassing private placements, trading platform operations, and custody services for cryptoassets. However, FINRA noted that much of this involvement is indirect, often carried out by affiliates or parent companies rather than the brokerage firms themselves.
Regulatory Challenges
This indirect involvement presents a significant challenge for regulators. As FINRA pointed out, their jurisdiction is limited to member firms and their associated persons, not extending to affiliates, parent companies, or unaffiliated third parties. This regulatory gap raises concerns about oversight and investor protection.
For activities falling under FINRA’s purview, the rules are clear: when cryptoassets are classified as securities, firms must comply with existing securities laws and FINRA rules. Additionally, certain FINRA rules apply to activities involving non-security cryptoassets.
Compliance Issues and Market Abuse
FINRA’s review identified several areas where member firms have struggled with compliance. These include potential violations of supervisory rules, such as due diligence failures, and marketing rule violations, like misrepresenting available investor protections. The regulator has also taken disciplinary action for violations of anti-money laundering rules, outside business activity requirements, trading rules, and record-keeping regulations.
Of particular concern is the potential for market abuse. FINRA has identified situations where individuals may be exploiting investor interest in cryptoassets and blockchain technology to perpetrate pump-and-dump schemes and other forms of market manipulation in equity markets.
Looking Ahead
As the cryptocurrency landscape continues to evolve, FINRA remains focused on understanding and adapting to the industry’s engagement with crypto-related activities. Greg Ruppert, Executive Vice President and Head of Member Supervision at FINRA, emphasized the organization’s commitment to protecting investors and safeguarding markets while supporting member firms in this rapidly changing environment.
The insights gained from this comprehensive review will inform FINRA’s ongoing regulatory work and help assess the industry’s exposure to potential stress events in the crypto sector. As the lines between traditional finance and cryptocurrency continue to blur, regulatory bodies like FINRA will play a crucial role in ensuring that innovation doesn’t come at the cost of investor protection and market integrity.
