Crypto assets, also known as digital assets, represent a broad category of financial instruments issued or transferred using distributed ledger or blockchain technology. These include virtual currencies, coins, tokens, and other digitally native assets. Whether a specific crypto asset qualifies as a security under federal law depends on its characteristics and use case, bringing it under the scrutiny of regulatory bodies like the Financial Industry Regulatory Authority (FINRA).
FINRA rules apply to member firms and associated persons engaged in crypto asset-related activities, regardless of whether the asset is deemed a security. This reflects the growing need to address the unique compliance challenges and investor risks presented by these innovative technologies.
Key Regulatory Developments and Notices
FINRA has issued several regulatory notices encouraging member firms to disclose their involvement with crypto assets. In Regulatory Notice 20-23 (July 2020) and Regulatory Notice 21-25 (July 2021), FINRA specifically asked firms to notify the authority if they—or their affiliates—engage in activities related to crypto assets, including those not classified as securities.
This outreach helped FINRA identify firms with direct or indirect exposure to crypto asset markets. Activities range from private placements and operating Alternative Trading Systems (ATS) for digital asset securities to proprietary trading and developing distributed ledger applications for traditional securities.
Types of Crypto Asset Activities by Member Firms
FINRA has observed several common activities among its member firms:
- Private Placements: Offering crypto assets that meet the definition of a security.
- Alternative Trading Systems (ATS): Operating platforms that facilitate trading of digital asset securities, in line with regulatory no-action letters.
- Special Purpose Broker-Dealers (SPBD): Entities focused specifically on custody and transactions involving digital asset securities.
- Proprietary Trading & Technology Initiatives: Firms trading crypto assets for their own account or developing blockchain-based solutions.
- Third-Party Relationships: Partnering with affiliates or external providers to offer clients access to crypto-related products.
Additionally, associated persons often engage in crypto activities through:
- Outside Business Activities (OBAs)
- Private Securities Transactions (PSTs), including those involving compensation
These require firms to implement strict supervisory measures per FINRA Rule 3280(c).
Membership and Compliance Requirements
Firms looking to enter the crypto asset space must adhere to specific application processes:
- New Membership Applications (NMAs): Required for prospective members under FINRA Rule 1013.
- Continuing Membership Applications (CMAs): Existing members must file a CMA for any material change in business operations, including new crypto-related activities, as stipulated in FINRA Rule 1017.
FINRA aligns its assessment of proposed crypto business lines with guidance from the Securities and Exchange Commission (SEC), ensuring consistency with federal securities laws.
FINRA’s Evolving Regulatory Approach
As crypto markets develop, FINRA continues to adapt its regulatory programs. Key initiatives include:
- The Crypto Hub: An enterprise-wide effort to monitor and respond to crypto-related regulatory challenges.
- The Crypto Asset Investigations Team (CAI): Focused on complex investigations involving digital assets.
- The Blockchain Lab: Drives innovation in regulatory technology and blockchain applications.
- The Crypto Asset Surveillance Team (CAST): Monitors trading and conduct for compliance with rules.
These groups work together to ensure that investor protection and market integrity remain central as new products and services emerge.
Frequently Asked Questions
What are crypto assets?
Crypto assets are digital instruments created or transferred using blockchain or distributed ledger technology. They include cryptocurrencies, utility tokens, security tokens, and other digital representations of value.
Do all crypto assets qualify as securities?
Not necessarily. Whether a crypto asset is a security depends on its structure and use case, assessed under frameworks like the Howey Test. Firms should seek legal guidance to determine applicable regulations.
What must firms report to FINRA regarding crypto activities?
Firms should notify FINRA if they—or their affiliates—engage in activities involving crypto assets, even if those assets are not securities. This includes trading, offering, custody, and technological development related to digital assets.
What are common compliance pitfalls with crypto assets?
Common issues include improper custody solutions, insufficient anti-money laundering (AML) protocols, inadequate disclosure of risks, and failure to supervise outside business activities of associated persons.
How can firms stay updated on crypto asset regulations?
Firms should monitor updates from FINRA, the SEC, and other regulatory bodies, and consider participating in industry discussions and FINRA’s educational resources 👉 Explore more regulatory strategies.
Are there specific rules for communicating with investors about crypto?
Yes. FINRA has conducted targeted reviews of retail communications concerning crypto products. Firms must ensure all claims are fair, balanced, and not misleading, adhering to existing advertising rules.
Investor Education and Protection
Crypto assets present unique risks, including volatility, technological complexity, and potential exposure to fraud. FINRA emphasizes the importance of investor education, providing resources that cover:
- How blockchain technology works
- Safe storage practices for digital assets
- Recognizing and avoiding common scams, including "pig butchering" and social media impersonation schemes
- Understanding the generational interest in crypto, particularly among younger investors
Investors are encouraged to conduct thorough research and approach crypto investments with caution.
Conclusion
The regulatory landscape for crypto assets is evolving rapidly. FINRA’s proactive stance—through notices, membership requirements, and specialized teams—ensures that member firms operate within a compliant framework while fostering innovation. Firms engaging with digital assets should maintain robust compliance programs, stay informed of regulatory updates, and prioritize transparent communication with investors.
For ongoing guidance and regulatory support, firms can leverage FINRA’s dedicated crypto resources and legal interpretations offered by the Office of General Counsel.