The Financial Industry Regulatory Authority (FINRA) released its Annual Regulatory Oversight Report and, for the first time, dedicated a section to crypto assets.
FINRA, a self-regulatory organisation that oversees securities broker-dealers in the US, included crypto assets in its 2024 Annual Regulatory Oversight Report.
FINRA Devotes a Section to Crypto in its Latest Report
The Financial Industry Regulatory Authority (FINRA) is a self-regulatory organisation overseeing securities broker-dealers in the US, membership of which is mandatory.
For the first time, the authority included a section on crypto assets in its 2024 Annual Regulatory Oversight Report. In its report, FINRA advises users to be cautious when engaging in crypto asset-related activities while urging firms to address regulatory challenges and risks involved in the industry. The authority also defined crypto or digital assets as “assets issued or transferred using distributed ledger or blockchain technology.”
The 90-page report details:
“Member firms seeking to engage in crypto asset-related activity should identify and address the relevant regulatory and compliance challenges and risks.”
Adding;
“This would include, for example, reviewing and evaluating their supervisory programs and controls, and compliance policies and procedures, in areas such as cybersecurity, AML compliance, communications with customers, manipulative trading, performing due diligence on crypto asset private placements and supervising their associated persons’ involvement in crypto asset-related outside business activities (OBAs) and private securities transactions (PSTs).”
Addressing Continued Security Breaches
The report also identified the rising involvement of malicious actors in the space and highlighted that these actors exploit assets with low market caps. The report explains:
“Bad actors are taking advantage of investor interest in crypto assets and blockchain technology by engaging in manipulative schemes similar to those that exist in the equities market, including those that are commonly associated with low-priced securities.”
While losses due to crypto hacks declined 51% in 2023 compared to 2022, security breaches remain of great concern to the industry.
Following SEC Guidance
FINRA falls under the US Securities and Exchange Commission’s (SEC) purview and describes its annual oversight report as “one of the tools a member firm can use to help inform the development and operation of its compliance program.”
Its “Crypto Asset Developments and Advertised Volume” is aimed at firms currently engaged in crypto asset-related activities or those intending to do so. Membership in FINRA’s program allows a firm to serve as an agency in private (non-public) placements, operate alternative trading systems for crypto asset securities and provide custody services.
The report describes its program in detail:
“FINRA’s Membership Application Program (MAP) follows the SEC’s guidance in assessing a firm’s proposed crypto asset securities business line under applicable rules, such as the SEC’s financial responsibility rules and customer protection rule.”
It adds:
“FINRA’s MAP has approved firms to engage in crypto asset securities business, including:
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serving as placement agent in the private placement of crypto asset securities;
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operating an Alternative Trading System (ATS) for crypto asset securities; and
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providing custodial services for crypto asset securities, under the SEC’s December 23, 2020, statement regarding Custody of Digital Asset Securities by Special Purpose Broker-Dealers (the “SPBD Policy Statement”).”
The authority further asks firms approved to engage in crypto activities to notify it when they or their affiliates engage or plan to engage in crypto asset-related activities, including activities related to crypto assets that are not securities.
The report also includes a substantial checklist for SEC compliance.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
