The U.S. Financial Industry Regulatory Authority (FINRA) has identified a significant increase in the involvement of U.S. brokerage firms in the crypto sector, raising concerns about activities occurring on the fringes of regulatory oversight. According to a recent FINRA guidance, nearly 400 brokerage firms are now engaged with crypto in some capacity, though much of this activity may fall outside the organization’s direct jurisdiction.
Key Takeaways:
- Increased Involvement: Nearly 400 U.S. brokerage firms are now involved in the crypto sector, though much of this activity may be outside FINRA’s direct oversight. Many firms conduct crypto activities through affiliates or parent companies, which are not under FINRA’s jurisdiction.
- Regulatory Compliance: Firms dealing with cryptoassets that are securities must comply with existing securities laws and FINRA rules.
- Challenges Identified: FINRA has identified challenges with supervisory, marketing, and anti-money laundering rules in the context of crypto activities.
- Market Abuse Risks: FINRA warns of potential market abuses, such as pump-and-dump schemes, exploiting investor interest in crypto.
FINRA’s findings, based on reviews and a survey of 600 firms, reveal that 390 firms are currently involved in the crypto space. This includes firms with active crypto businesses, those planning to launch crypto ventures, and firms that have partnerships or affiliations with crypto companies. Additionally, some firms employ representatives who have disclosed outside business activities related to crypto, such as trading, mining, or operating crypto funds.
The activities of these firms in the crypto sector are diverse, ranging from handling private placements and operating trading platforms to providing custody services for cryptoassets. However, FINRA noted that much of this involvement is indirect, with many crypto-related activities being conducted by affiliates or parent companies rather than the brokerage firms themselves.
While FINRA maintains jurisdiction over its member firms and their associated persons, it does not extend this oversight to their affiliates or parent companies that are not member firms. This limitation poses challenges in ensuring comprehensive regulatory coverage of crypto activities.
Firms and representatives within its jurisdiction must comply with existing securities laws and FINRA rules, particularly when dealing with cryptoassets that are classified as securities. The regulator also highlighted that certain FINRA rules apply to activities involving cryptoassets that are not considered securities.
FINRA expressed concern over member firms encountering difficulties with various rules, including supervisory obligations, marketing regulations, and anti-money laundering requirements. The organization has already taken disciplinary actions against firms for violations related to crypto activities, including issues with due diligence, misrepresentation of investor protections, and record-keeping failures.
The regulator also warned of potential market abuses, such as pump-and-dump schemes, where individuals exploit investor interest in cryptoassets and blockchain technology.
