The Financial Industry Regulatory Authority (FINRA) has released a detailed report shedding light on the involvement of its member firms in crypto asset activities, along with the compliance challenges they face. This update is based on a 2023 survey sent to nearly 600 member firms, of which about 390 were found to be engaged in various forms of crypto-related activities. These activities range from private placements of crypto assets and operation of alternative trading systems (ATSs) for crypto securities, to providing custody services and engaging in blockchain initiatives.
Scope of Crypto Asset Involvement
The survey revealed that many firms are involved in a broad spectrum of crypto-related activities, often in collaboration with affiliates or third parties. These include proprietary trading, running crypto asset trading platforms, offering custodial services, and providing investment banking services for crypto-related entities. Additionally, FINRA identified various outside business activities related to crypto, such as crypto asset trading, managing investment funds, selling crypto asset private placements, and participating in crypto mining.
Compliance Challenges and Regulatory Concerns
FINRA’s report highlights several compliance issues that member firms face in the rapidly evolving crypto asset sector. The key areas of concern include public communications, supervision, anti-money laundering (AML) compliance, and adherence to standards of commercial honor and trade principles. Notably, FINRA observed misrepresentations regarding federal securities law protections in crypto activities, insufficient due diligence for crypto private placements, and inadequate supervision of crypto-related activities.
Moreover, FINRA identified market abuse risks, such as potential pump-and-dump schemes involving crypto assets and market manipulation in crypto securities traded on registered ATSs.
Guidance for Firms
FINRA’s findings underscore the importance of proactive regulatory compliance in the crypto sector. The organization encourages member firms to enhance their supervisory programs, controls, and compliance policies, with a particular focus on areas like cybersecurity, AML compliance, public communications, and due diligence. FINRA also emphasizes the need for ongoing dialogue between firms and their risk monitoring analysts to navigate the regulatory challenges posed by crypto asset activities effectively.
As the crypto market continues to grow, FINRA’s insights provide valuable guidance for firms striving to operate within a complex and evolving regulatory landscape.
Source: natlawreview.com
