News Update: FINRA Notice 18-20

 In Compliance/ Risk Management, Industry News

Background and Summary
On July 6, 2018, FINRA published Notice 18-20 regarding member firm involvement in digital currency. This notice addressed the fact that the market for digital assets, including cryptocurrencies and virtual coins, has grown significantly in recent months, particularly amongst retail investors. The regulator reiterated its growing concerns specific to investor protection, including incidences of fraud and other securities law violations involving digital assets and the platforms on which they trade.

As such, FINRA has indicated an interest in remaining well-informed of the extent to which member firms are involved in this space. Firms that engage or begin to engage in such activities are reminded to consider all applicable federal and state laws, rules and regulations, including FINRA and SEC rules and regulations.

To better understand the scope of such activities, FINRA Regulatory Coordinators recently conducted a survey regarding firms’ involvement in activities related to digital assets. In addition, the 2018 RCA Survey contained questions regarding digital assets. FINRA announced in this Notice that it is supplementing these efforts by requesting that each firm promptly provide notification to its Regulatory Coordinator if it or its associated persons (including activities under Rules 3270 and 3280) or affiliates, currently engages (or intends to engage) in activities related to digital assets, including digital assets that are non-securities. 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.

Our Take
As always, it is our position at CRC that cooperation with regulators is key for the successful operation of financial services organizations. Regulators have continued to display heightened focus on the protection of retail and senior investors. As such, digital currency in particular is a developing area where cooperative, responsible players will hold the ace. Prompt, efficient, and honest communication and responses will satisfy regulators and clients alike, while also bringing a sense of legitimacy and scrupulousness to digital currency operations.

If you need assistance drafting a response to this request, or have any other questions regarding digital currency, please do not hesitate to contact Mitch Avnet at mavnet@compliance-risk.com.

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