The Onramp Academy team often writes updates on the regulatory landscape of cryptoassets and DeFi to keep advisors abreast of important changes across the industry. While many of our previous briefs were focused around comments from the SEC, Senate and Congressional representatives, the White House, and the CFTC, this edition of the Onramp Invest blog will update our readers on commentary from FINRA.
FINRA recently announced that they are going to prioritize cryptoassets, expungement reform, and options account paperwork in 2022. During a January webinar with the SIFMA Compliance & Legal Society, FINRA President and CEO Robert Cook clarified that the organization will continue to defer to the SEC, CFTC, Congress, and other regulatory bodies when it comes to widespread oversight of cryptoassets and DeFi. However, with the continued growth of the asset class, FINRA plans to release a regulatory notice of their own in the near future providing member firms with further guidance on the sale, disclosures, and advertisement of cryptoassets within their business.
As mentioned above, FINRA will point to other key organizations, primarily the SEC, for explicit regulatory and compliance measures in relation to this emerging asset class. Cook alluded to the need for unified, explicit guidance to ensure that there is no confusion amongst investors moving forward, and noted his concern around the number of regulators currently overseeing various areas of the crypto market. As many others stated before him, Cook implied the need for a single body dedicated to governing the entire space, rather than various organizations piecemealing regulation in a way that can easily confuse market participants.
Cryptoasset guidance offered by FINRA in the past has been little more than encouraging transparency by member firms participating in the crypto economy. For example, in 2018 FINRA’s Regulatory Notice 18-20 encouraged firms to keep their regulatory coordinator informed if the firm, or its associated persons, engaged, or intended to engage, in activities related to cryptoassets. Even if said activity included cryptoassets that are non-securities, FINRA encouraged firms to disclose it. In 2019, Regulatory Notice 19-24 encouraged firms to notify the organization if they engaged in any activities related to cryptoassets.
In contrast to previous commentary, FINRA’s upcoming regulatory notice will provide more definitive guidance in regard to the following items (among others) for member firms and their affiliates, specifically identifying ways in which rules should evolve with a focus on investor protection:
- Custody of cryptoassets
- Mining of cryptoassets
- Acceptance of cryptoassets from customers
- Purchases, sales, or executions of transactions in cryptoassets directly, within a pooled fund investing in cryptoassets, in derivatives (e.g., futures, options) tied to cryptoassets, or participation in an initial or secondary offering of cryptoassets, such as an initial coin offering (ICO)
- Displaying indications of interest or quotations in cryptoassets
- Providing or facilitating clearance and settlement services for cryptoassets
- Creation of, management of, or provision of advisory services for, a pooled fund related to cryptoassets
- Creation or management of a platform for the secondary trading of cryptoassets
- Recommending, soliciting, or accepting orders in cryptoassets
With all of the above promoting transparency and improving investor protections, one of Cook’s concerns is centered around the fact that many investors are purchasing cryptoassets from member broker-dealers. In doing so, they may not entirely realize the difference between investments that do and don’t constitute securities under the regulatory framework as it stands now. With that in mind, FINRA’s upcoming notice is likely to explore whether there is a need for enhanced requirements to help investors understand when their investments are regulated vs. if they fall outside of the current broker-dealer regulatory scheme.
The above outline for FINRA’s upcoming regulatory notice appears rather comprehensive, and advisors should keep an eye out for the organization’s formal guidance later on in 2022 (no specific date has been given yet). In the meantime, there are a few important takeaways for those reading this blog ahead of the regulatory notice’s publication. If you are a registered representative or part of a broker-dealer in any capacity, be forthcoming by disclosing any and all activity in relation to cryptoassets. As emphasized in previous regulatory notices, FINRA fully expects broker-dealers and their affiliates to understand the underlying technology of the crypto economy as well as document what functions, if any, they are performing within the space and the players in the ecosystem that they are cooperating with to perform said functions. By being proactive and erring on the side of caution, registered reps, and even advisors that are not part of a broker-dealer for that matter, may save themselves from having to painstakingly backtrack in the future as the regulatory landscape further evolves. If nothing else, advisors and firms that thoughtfully disclose activity within the crypto economy are promoting clear communication with regulators and clients alike.
As stated in our 2022 Crypto and DeFi Market Outlook in Onramp Academy, 2022 will be heavily focused on delivering regulatory clarity on cryptoassets and DeFi to the masses with an explicit focus on investor protections. It is up to major regulatory bodies to come together in 2022 to provide unified regulatory guidance that provides investors and institutions with the clarity they need to fully embrace the asset class. While financial advisors should keep their eyes peeled for regulatory updates from the likes of FINRA, the SEC, CFTC, Congress, and more, the areas of focus noted above should give financial professionals a loose framework for getting started on remaining transparent and compliant when it comes to participation in the crypto ecosystem.
With gratitude, Your Onramp family