By And lastly, and I think very importantly, there is that immediacy and finality of crypto transactions which leads to being extremely difficult for investors to track and claw back funds or crypto assets in the event of fraud. On this episode, the first in a three-part series, we sit down with Omer Meisel, Senior Vice President of the Complex Investigations and Intelligence Group, Jason Foye, Senior Director and Head of FINRA’s Crypto Hub, and Reema Abdelhamid, a Director with FINRA Enforcement to learn more about the strategy and the role of the Hub and FINRA’s work to advance its mission of investor protection and market integrity. And now I want to shift gears a bit and discuss what we’re seeing in the context of a more targeted advertising regulation investigation. And specifically, our Ad Reg department has focused on the crypto asset-related communications by the broker-dealer or an affiliate of 17 member firms for an approximately three-month period.
And for those who are interested, you can find the November 2022 Crypto Asset Communications Exam letter on the FINRA website. This examination looked at different aspects of the advertising materials to evaluate disclosures in these materials, and the preliminary results have shown certain patterns. On this episode, the first in a three-part series, we sit down with Omer Meisel, Senior Vice President of the Complex Investigations and Intelligence Group, Jason Foye, Senior Director and Head of FINRA’s Crypto Hub, and Reema Abdelhamid, a Director with FINRA Enforcement to learn more about the strategy and the role of the Hub and FINRA’s work to advance its mission of investor protection and market integrity. As part of these efforts, FINRA has established nodes on the Ethereum and Bitcoin blockchains and explored the use of publicly available crypto asset market data. And in that group, we conducted reviews to understand what the members and reps were doing in the crypto asset space at that time. This growth has included increased product offerings and retail investor participation, especially among younger investors.
And, as Jason said, he’s the Chief of the Hub and he’s like the conductor of an orchestra, who works with the various department program managers represented on the Hub to orchestrate strategy, communication, coordination and cross-enterprise crypto asset projects comprising the overall program that, together, realize our strategic goals and objectives. This update summarizes initial themes from this targeted exam and poses questions for firms to consider if they use retail communications concerning Crypto Assets. This update does not create new legal or regulatory requirements or new interpretations of existing requirements, nor does it relieve firms of any existing obligations under federal securities laws and regulations.
Crypto assets—also known as digital assets—are assets issued or transferred using distributed ledger or blockchain technology. When it comes to surveilling the crypto marketplace, FINRA has identified potential violations of its rules, and some themes identified with respect to these potential violations. Notably, an “investment contract” that is a “security” under other federal securities laws is not a “security” under SIPA unless it is the subject of a Securities Act registration statement.
When firms fail to establish reasonable AML programs, when the crypto asset activities are occurring by, at, or through the member firm. We learn more about this dedicated group of investigators specializing in conducting complex crypto asset investigations and the crucial role it plays in ensuring compliance with existing rules and regulations in the crypto asset space. FINRA follows the SEC’s guidance in assessing a firm’s proposed digital asset securities business line under applicable rules, such as the SEC’s financial responsibility rules and customer protection rule. So, I really think it’s important for firms to either directly or indirectly have some exposure to crypto asset business lines to take a look at their controls to mitigate those risks in this space as we’re seeing not necessarily indicative of having the crypto business line.
9 See the Report’s Private Placements topic for additional guidance related to conducting reasonable due diligence on unregistered offerings. 8 See the Report’s Cybersecurity and Technological Management topic, and FINRA’ Cybersecurity Key Topics page and Industry Risks and Threats – Resources for Member Firms webpages, for additional guidance related to effective cybersecurity practices and controls. 7 See the Report’s AML, Fraud and Sanctions topic for additional guidance related to developing and implementing a reasonably designed AML compliance program.
SIPA also provides criminal penalties for false representations that a person or account is protected by SIPC where made with actual knowledge of their falsity and intent to deceive or cause injury. FINRA is also developing blockchain-related regulatory initiatives to explore on-chain data, and building tools and exploring vendor solutions that can support and enhance FINRA’s regulatory capabilities. Jason Foye, chief of FINRA’s Crypto Hub, offers an inside view of the agency’s crypto asset oversight activities.
And then lastly, another area of focus from a fraud perspective for CAI is misrepresentations and omissions of material facts regarding crypto assets or the crypto asset exposure that’s being offered or provided by a firm or a rep to customers. So, considering crypto-specific risks and ensuring those risks are balanced with the discussion that’s happening on potential rewards of an offering or of a service that’s being offered, for example, and then also ensuring that a review of some sort is conducted to assess whether statements appear to be exaggerated or unwarranted, for example. I think we do want to acknowledge that these fraud risks probably sound familiar to other more traditional business lines. But I do think that when crypto is involved, some aspects are unique because crypto assets have different features than tradfi. I’ll note here that these business lines are represented in FINRA’s membership, both directly and indirectly, meaning some firms, mostly firms operating in an alternative trading system, or ATS, or firms offering crypto private placements, are directly engaged in crypto business activities.
It’s important to note for the audience that FINRA requires approval by our Member Application Program for firms engaging in material crypto asset securities business. Firms seeking approval for such a business line must provide specific information to FINRA, demonstrating that the firms meet applicable requirements under the securities laws and FINRA’s Rules. And FINRA follows the SEC’s guidance in assessing these proposed businesses involving crypto asset securities under applicable rules, such as the SEC’s financial responsibility rules and customer protection rule.
We can definitely provide links to some of the relevant guidance documents in the show notes, and the audience can also check out that recent FINRA Unscripted episode that you all did with the MAP program that really digs into the process for reviewing and approving firms with material crypto asset securities business lines. Prior to the Hub being established, FINRA also established the Crypto Asset Investigations (CAI) team and Blockchain Lab, which are specialized units staffed with crypto asset subject matter experts. CAI conducts complex investigations related to crypto asset fraud and collaborates with FINRA’s exam program to conduct risk-based examinations of firms’ compliance with FINRA rules and federal securities laws and regulations related to crypto assets. The Blockchain Lab serves as a central point within FINRA for the development of blockchain-related regulatory initiatives and helps build or source technology solutions to facilitate oversight of blockchain-related activities. Additionally, FINRA recently established a Crypto Asset Surveillance Team, which works in collaboration with the Hub and supports FINRA’s ability to conduct surveillance of the crypto asset markets. An important example of this mission in action is our work to address the unique regulatory challenges presented by the activities of our member firms that relate to crypto assets—also known as digital assets—which are assets issued or transferred using distributed ledger or blockchain technology.
And lastly, I think we really pay close attention to what’s happening in other agencies. We are looking to what the states are doing, what federal agencies An Inside Look Into Finras Crypto Asset Work are doing, what other SROs are doing and what legislation may come. So, we are up to date with all of those changes as we hear about them very frequently.
FINRA also investigates potential market abuse involving crypto asset securities traded on registered ATSs. However, FINRA is committed to this work and ensuring that whatever the future holds, we are prepared to fulfill our regulatory mandate and advance our core mission to protect investors and safeguard market integrity. And as the blockchain technology creates new potential financial solutions, we will be prepared to grow and adapt to any of those potential changes.
And the Blockchain Lab will also partner with our technology department and the Crypto Hub to develop blockchain-related regulatory initiatives, identify new technology opportunities and build blockchain expertise. FINRA requires approval by its Membership Application Program for firms’ material crypto asset securities business lines. Firms seeking approval for such a business line must provide specified information to FINRA and meet the applicable requirements under the securities laws and FINRA rules. So, I think some controls to consider with this misappropriation of asset risk with crypto assets specifically are to get a strong understanding of who has access to the private keys used in offerings, establish strong cyber and operational controls to govern how and when crypto assets are being accepted, stored and accessed.
- So, I really think it’s important for firms to either directly or indirectly have some exposure to crypto asset business lines to take a look at their controls to mitigate those risks in this space as we’re seeing not necessarily indicative of having the crypto business line.
- Even with the recent decline in assets, the size of the crypto asset market, retail investor participation in it, and recent events, such as the collapse of FTX, underscore the importance of our work in this area.
- Compliance News is a website dedicated to keeping securities compliance professionals up-to-date and well informed.
- FINRA also investigates potential market abuse involving crypto asset securities traded on registered ATSs.
- Rather, this update poses questions for firms to consider as they review and supervise their retail communications concerning Crypto Assets.
At the same time, FINRA is engaged in a variety of initiatives designed to build for the future and enhance our capabilities. Key aspects of this work are our efforts to engage with other state, federal, and international regulators and agencies to discuss crypto asset regulatory efforts and developments, as well as our efforts to engage with member firms and other industry participants to better understand current crypto asset activities and issues. A special summit attended by crypto asset subject matter experts from FINRA and the National Futures Association is one example of this work. We recently formed a dedicated crypto asset surveillance team that’s going to be leading our efforts on this front in coordination with different groups across the organization and with the Hub. There’s so much going on right now at FINRA with respect to crypto assets, I certainly can’t cover all the incredible work that’s being done across the organization in such a short amount of time.
