There are now almost 400 U.S. brokerage firms that are involved in the crypto sector in one way or another — and much of their activity may be taking place on the fringes of regulators’ jurisdiction, according to the U.S. Financial Industry Regulatory Authority Inc. (FINRA).
On Tuesday, the industry self-regulatory organization (SRO) issued a guidance note based on its reviews of firms’ crypto activities, which found that, so far, there are 390 firms involved with crypto in some form.
This includes firms that have an active crypto business, plan to launch a crypto venture, or have a partnership or affiliation with a crypto firm. It also includes firms that employ reps that have disclosed outside business activities involving crypto, or engaged in private securities transactions in cryptoassets (such as crypto trading, crypto mining and operating crypto funds).
The activities of FINRA firms in the crypto sector include handling private placements, operating trading platforms and providing custody services for cryptoassets, it noted.
However, the SRO also found that much of this involvement was indirect, with the crypto activity being carried out by firms’ affiliates, or parent companies, rather than the brokerage firms directly.
“While FINRA has jurisdiction over the activity and conduct of our member firms and their associated persons, it does not have jurisdiction over their affiliates, parent companies or other unaffiliated third parties that are not otherwise member firms,” FINRA said in its notice.
As for firms and reps that are under its jurisdiction, where the cryptoassets themselves are considered securities, they must comply with existing securities laws and FINRA rules, the SRO noted.
Additionally, certain FINRA rules apply to activities that involve assets other than securities, including cryptoassets that are not securities, the guidance said.
Against that backdrop, the SRO said it has identified member firms that have “encountered challenges with various FINRA rules” involving their crypto activities — including potential violations of supervisory rules (such as due diligence failures) and violations of marketing rules (firms misrepresenting the availability of investor protections to crypto).
The regulator has also taken disciplinary action for violations of anti-money laundering rules, outside business activity requirements, trading rules and record keeping regulations, it noted.
FINRA said it has “identified potential situations where individuals are seeking to take advantage of investor interest in cryptoassets and blockchain technology to perpetrate pump-and-dump schemes and other forms of market abuse in the equity markets.”
The notice outlining the brokerage industry’s involvement in crypto was informed by a survey conducted by FINRA with 600 firms, along with its ongoing supervisory work.
The SRO said its analysis of the industry’s crypto activities is meant to inform its regulatory work and to allow it to understand the industry’s exposure to possible stress events in the crypto sector.
“As the crypto landscape continues to evolve, FINRA is focused on where and how our firms may be engaging in crypto-related activities and how we can adapt to continue to protect investors and safeguard the markets effectively, while supporting our member firms,” said Greg Ruppert, executive vice president and head of member supervision at FINRA, in a release.