FINRA Encourages Firms to Notify their Coordinators if They Engage in Activities Related to Digital Assets

July 24, 2018

In July 2018, the Financial Industry Regulatory Authority (“FINRA”) issued Regulatory Notice 18-20 (“Regulatory Notice”) with respect to digital assets. FINRA notes in the Regulatory Notice that the market for digital assets, such as cryptocurrencies and other virtual coins and tokens, has grown significantly alongside investor interest in such assets.

FINRA also notes that as interest in the digital asset markets grow, investor protection concerns increase. The Regulatory Notice encourages member firms to promptly notify their Regulatory Coordinators if they or their associated persons or affiliates currently engage, or intend to engage, in activities related to digital assets, including those that are not securities. Firms may notify FINRA via email during the notification period effective until July 31, 2019.

Activities about which firms should advise their Coordinators include, but are not limited, to those outlined below:

  • Purchases, sales, or executions of transactions in digital assets
  • Purchases, sales, or executions of transactions in a pooled fund that invests in digital assets
  • Creating, managing or providing advisory services for a pooled fund related to digital assets
  • Purchases, sales, or executions of transactions in derivatives (e.g., futures or options) that are tied to digital assets
  • Participation in an initial or secondary offering of digital assets (e.g., ICO, pre-ICO)
  • Creating or managing a platform for the secondary trading of digital assets
  • Custody or similar arrangement of digital assets
  • Accepting cryptocurrencies (e.g., bitcoin) from customers
  • Mining of cryptocurrencies
  • Recommending, soliciting or accepting orders in cryptocurrencies and other virtual coins or tokens
  • Displaying indications of interest or quotations in cryptocurrencies and other virtual coins or tokens
  • Providing or facilitating clearance and settlement services for cryptocurrencies and other virtual coins or tokens
  • Recording cryptocurrencies and other virtual coins or tokens using distributed ledger technology or any other use of blockchain technology

FINRA reminds firms that any material changes to a firm’s business operations also require the firm to file a Continuing Membership Application (“CMA”) and obtain approval from FINRA.[1] FINRA also indicated that if a firm has already submitted a CMA regarding its involvement in activities related to digital assets, or otherwise has provided notification to its Regulatory Coordinator in response to a direct request, or via the 2018 RCA Survey, then the Firm does not need to provide additional notice unless an additional change has occurred.

For more information on this Regulatory Notice, please contact your ACA consultant or Dee Stafford at (561) 628-5288 or dstafford@acacompliancegroup.com.

 

[1] FINRA Rule 1011 Definitions (k) “material change in business operations” states that the term “material change in business operations” includes, but is not limited to: (1) removing or modifying a membership agreement restriction; (2) market making, underwriting, or acting as a dealer for the first time; and (3) adding business activities that require a higher minimum net capital level under SEC Rule 15c3-1.