Crypto Compliance in Focus: FINRA Unveils Key Insights on Member Firms’ Digital Asset Activities

The Financial Industry Regulatory Authority (FINRA) released a comprehensive update on its insights into its member firms’ involvement in crypto asset activities, revealing significant trends and compliance challenges in the growing crypto asset sector.

Scope of Crypto Asset Involvement

In 2023, FINRA distributed a questionnaire to nearly 600 member firms, identifying approximately 390 firms with some form of crypto asset involvement.  The survey uncovered a wide range of crypto-related activities among member firms, including private placements of crypto assets, operation of alternative trading systems (ATSs) for crypto asset securities, and custody services. FINRA found that some firms have established relationships with affiliates or third parties to provide customers access to crypto trading and custody services, while others are engaging in blockchain and have distributed ledger technology initiatives.

FINRA also noted numerous outside business activities and private securities transactions related to crypto assets among associated persons. These include proprietary trading of crypto assets, operating investment funds, selling crypto asset-related private placements and participating in crypto mining operations.

Beyond direct involvement, FINRA identified member firms with parent companies or affiliates engaged in various crypto asset-related activities.  These include operating crypto asset trading platforms, proprietary trading, providing custodial services, and offering investment banking and advisory services for crypto-related entities.

Compliance Challenges and Regulatory Concerns

FINRA highlighted several compliance challenges faced by firms engaged in crypto activities. Potential violations were observed in areas such as communications with the public,[1] supervision,[2] anti-money laundering (AML) compliance,[3] and standards of commercial honor and principles of trade.[4] FINRA specifically noted issues with misrepresentations regarding the protections of federal securities laws to crypto asset-related activities, failures in due diligence for crypto asset private placements and inadequate supervision of crypto asset activities.

The regulator also identified market abuse concerns, including potential pump-and-dump schemes in equity markets related to crypto assets and market abuse involving crypto asset securities traded on registered ATS.

As the crypto sector continues to expand, FINRA’s findings provide valuable insights for member firms operating in this complex regulatory environment. In light of these findings, FINRA emphasizes the need for member firms to proactively address regulatory and compliance challenges associated with crypto asset activities. To that end, FINRA stressed the importance of ongoing dialogue between firms and their risk monitoring analysts regarding crypto asset activities and emerging regulatory challenges.

Firms are advised to review and enhance their supervisory programs, controls and compliance policies, particularly in areas like cybersecurity, AML compliance, public communications and due diligence processes for crypto asset-related ventures. Member firms should also carefully consider FINRA’s observations when developing or modifying their policies and procedures related to crypto asset activities.

[1] FINRA Rule 2210, https://www.finra.org/rules-guidance/rulebooks/finra-rules/2210.

[2] FINRA Rule 3110, https://www.finra.org/rules-guidance/rulebooks/finra-rules/3110.

[3] FINRA Rule 3310, https://www.finra.org/rules-guidance/rulebooks/finra-rules/3310.

[4] FINRA Rule 2010, https://www.finra.org/rules-guidance/rulebooks/finra-rules/2010.