Scarinci Hollenbeck, LLC, LLCScarinci Hollenbeck, LLC, LLC

Firm Insights

FINRA Wants to Know If Broker-Dealers Are Involved in Digital Assets

Author: Scarinci Hollenbeck, LLC

Date: July 29, 2020

Key Contacts

Back

The Financial Industry Regulatory Authority (FINRA) is ‘encouraging’ broker-dealers to keep it informed about their activities involving digital assets…

FINRA Wants to Know If Broker-Dealers Are Involved in Digital Assets

The Financial Industry Regulatory Authority (FINRA) is ‘encouraging’ broker-dealers to keep it informed about their activities involving digital assets. Under Notice 20-23, FINRA is requesting that broker-dealers keep their Risk Monitoring Analyst informed if the firm, or its associated persons or affiliates, currently engages, or intends to engage, in any activities related to digital assets.

“As the area of digital assets continues to evolve and present unique regulatory challenges, FINRA believes it is important to keep the lines of communication with [dealers] open,” FINRA said in the Notice.

FINRA Oversight of Digital Assets

Although FINRA has not established specific rules governing the emerging industry, its latest Notice confirms that it plans to keep a close eye on firms’ digital asset activities, even those that may not be considered “securities.” Digital assets that fall under the definition of an “investment contract” under Section 2(a)(1) of the Securities Act of 1933 or under Section 3(a)(10) of the Securities Exchange Act of 1934 are considered  “securities” and governed by the federal securities laws and FINRA rules.

Last summer, FINRA and the SEC staff issued a Joint Statement regarding broker-dealer custody of digital assets. The Joint Statement emphasized that “digital asset securities and related innovative technologies raise novel and complex regulatory and compliance questions and challenges.” It went on to discuss several concerns that are unique to digital assets, including compliance with the custodial requirements under Rule 15c3-3 under the Exchange Act, which is known as the Customer Protection Rule.

In its Risk Monitoring and Examination Priorities Letter for 2020, FINRA identified digital assets as an examination priority, citing that they raise novel and complex regulatory issues under federal securities laws and FINRA rules. FINRA also noted that receiving an increasing number of New Member Applications (NMAs) and Continuing Member Applications (CMAs) from firms seeking to engage in business activities related to digital assets. As set forth in FINRA 2020 Priorities Letter, it may take the following factors, among others, into consideration when reviewing a firm’s digital asset activities:

  • If your firm is considering engaging in digital asset activities, has it filed a CMA with FINRA?
  • Does your firm provide a fair and balanced presentation in marketing materials and retail communications, including addressing risks presented by digital asset investments, and not misrepresenting the extent to which digital assets are regulated by FINRA or the federal securities laws or eligible for protections thereunder (such as Securities Investor Protection Corporation coverage)?
  • Do your firm’s communications misleadingly imply that digital asset services offered through an affiliated entity are offered through and under the supervision, clearance, and custody of a registered broker-dealer?
  • If your firm is engaging in digital asset transactions, what controls and procedures has it established to support facilitation of such transactions, including initial issuance or secondary market trading of digital assets?

FINRA’s Latest Digital Asset Guidance

FINRA issued its latest guidance on July 18, 2020. For purposes of the Notice, the term “digital asset” refers to cryptocurrencies and other virtual coins and tokens (including virtual coins and tokens offered in an initial coin offering (ICO) or pre-ICO), and any other asset that consists of, or is represented by, records in a blockchain or distributed ledger (including any securities, commodities, software, contracts, accounts, rights, intangible property, personal property, real estate or other assets that are “tokenized,” “virtualized” or otherwise represented by records in a blockchain or distributed ledger).  

As set forth in the Notice, the types of activities of interest to FINRA if undertaken (or planned) by a member, its associated persons or affiliates, is extensive and includes, 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.

What Could be Required in the Future?

FINRA’s “request” will be effective until July 31, 2021. However, assuming the digital assets industry continues to evolve, and given the ‘warnings’ in the Notice and Joint Statement, firms should expect regulators to continue to keep a watchful eye on their involvement with this category of investment for the foreseeable future.

If you have questions, please contact us

If you have any questions or if you would like to discuss these issues further,
please contact Paul Lieberman or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.

No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.

Scarinci Hollenbeck, LLC, LLC

Related Posts

See all
Are Stay Interviews the Key to Retaining Top Talent? post image

Are Stay Interviews the Key to Retaining Top Talent?

Retaining top talent continues to be one of the greatest challenges facing employers today. Even in an employer’s market, the loss of a key employee can disrupt operations and result in significant costs. While compensation plays a role, long-term retention often depends on workplace culture, communication, and employee engagement. One increasingly popular strategy for improving […]

Author: Angela A. Turiano

Link to post with title - "Are Stay Interviews the Key to Retaining Top Talent?"
Why Secured Transactions Are Important post image

Why Secured Transactions Are Important

Secured transactions form the backbone of a wide range of business dealings, including business loans, mortgages, and inventory financing. Because the stakes are often high and relatively minor oversights can have drastic consequences, lenders and borrowers should thoroughly understand how to form an enforceable security agreement that protects their legal rights. What Is a Secured […]

Author: Dan Brecher

Link to post with title - "Why Secured Transactions Are Important"
Don’t Cash a “Paid in Full” Check Without Understanding the Legal Implications post image

Don’t Cash a “Paid in Full” Check Without Understanding the Legal Implications

Cashing a check marked “paid in full” can be a risky endeavor, particularly if you don’t fully understanding the legal implications. If you are owed more than the amount of the check you accept and deposit, you may waive your right to collect the full disputed amount. That is why you should consider either rejecting […]

Author: Dan Brecher

Link to post with title - "Don’t Cash a “Paid in Full” Check Without Understanding the Legal Implications"
Changes to Qualified Small Business Stock Will Benefit Startup Founders and Investors post image

Changes to Qualified Small Business Stock Will Benefit Startup Founders and Investors

The One Big Beautiful Bill Act of 2025 (OBBBA) significantly impacts federal taxes, credits, and deductions. A key change relating to Qualified Small Business Stock (QSBS) allows greater tax-free gains for investments in startups and other qualifying small businesses. Company founders and other investors should understand how the enhanced tax strategy works or risk missing […]

Author: Dan Brecher

Link to post with title - "Changes to Qualified Small Business Stock Will Benefit Startup Founders and Investors"
Corporate Consolidation and Antitrust Issues in Mergers post image

Corporate Consolidation and Antitrust Issues in Mergers

Corporate consolidation involves two or more businesses merging to become a single larger entity. The result is often a stronger and more competitive company that can better navigate today’s competitive marketplace. What Is Corporate Consolidation? Corporate consolidation closely resembles a basic merger transaction. The primary difference is that a consolidation creates an entirely new business […]

Author: Dan Brecher

Link to post with title - "Corporate Consolidation and Antitrust Issues in Mergers"
What is Business Law and Why Is it Important? post image

What is Business Law and Why Is it Important?

Business law plays a critical role in nearly every aspect of running a successful enterprise, from negotiating a commercial lease to drafting employee policies to fulfilling corporate disclosure obligations. Understanding what is business law and your legal obligations can help your business run smoothly and build productive relationships with clients, business partners, regulators, and others. […]

Author: Dan Brecher

Link to post with title - "What is Business Law and Why Is it Important?"

No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.

Sign up to get the latest from our attorneys!

Explore What Matters Most to You.

Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.

Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.

Let`s get in touch!

* The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form. By providing a telephone number and submitting this form you are consenting to be contacted by SMS text message. Message & data rates may apply. Message frequency may vary. You can reply STOP to opt-out of further messaging.

Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!