FINRA Provides Guidelines for Member Firms Engaging in Activities Related to Digital Assets
The Financial Industry Regulatory Authority ("FINRA") recently issued Regulatory Notice 18-20 ("Notice 18-20") with respect to digital assets. FINRA requires member firms to notify their FINRA Regulatory Coordinator in writing of its involvement in activities related to digital assets. In general, a material change in a FINRA member's business requires the submission and approval of a continuing membership application ("CMA"). If a member firm already has submitted a CMA regarding its involvement in activities related to digital assets, or provided notification to its Regulatory Coordinator in response to a direct request, or by way of the 2018 Risk Control Assessment ("RCA") Survey, FINRA does not require additional notice unless a change has occurred.
Until July 31, 2019, each FINRA member is encouraged to keep its FINRA Regulatory Coordinator updated if it engages in a new type of activity relating to digital assets not previously disclosed. Here is a list of the types of activities of interest to FINRA. • 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; • 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; or • Recording cryptocurrencies and other virtual coins or tokens using distributed ledger technology or any other use of blockchain technology.
Consistent with Notice 18-20, FINRA also issued an Investor Alert, dated August 16, 2018, which was intended to inform investors that investments in digital asset, such as initial coin offerings ("ICOs") and cryptocurrencies, can involve significant uncertainty, as well as risks that are different from more conventional assets like stocks or bonds. ICOs, cryptocurrencies and the technologies that power them may hold great potential for legitimate innovations in capital raising and financial markets, but it can be a challenge for investors to verify information about these products to make informed decisions. FINRA provided a list of things investors should know about ICOs, as follows: • ICOs offer little investor protection; • ICO fraud is real; • Online platforms that facilitate trading in ICO tokens are not registered exchanges; • Investors are losing millions to ICO theft; • Receipt of future tokens is not guaranteed in an ICO; • Simple Agreement for Future Equity ("SAFE") don't make ICOs "safe"; • FOMO (fear of missing out) can inflate ICO valuations.
FINRA also provided a list of common sense tips for those that decide to purchase a digital asset: • Only invest with money you can afford to lose; • Practice diversification; • Check out the background and registration status of any individual recommending or selling an investment, including ICOs; • Collect and review information about ICOs from regulators and trusted media outlets; • Run the investment by others; • New technologies and media buzz are often the recipe for the latest pumpanddump scheme; • SAFEs or SAFTs ("Simple Agreement for Future Token").
This recent guidance from FINRA highlights the importance of providing full disclosure to customers trading digital assets, including tokens and virtual currencies and a reminder that all investments come with a degree of risk and ICOs and cryptocurrencies are no exception. For more information on these recent FINRA releases, please contact Dan Viola at firstname.lastname@example.org or 212.573.8038.