Updated Rules by the Financial Industry Regulatory Authority (FINRA)

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The United States Financial Industry Regulatory Authority (FINRA) has extended the deadline for companies to report their cryptocurrency ventures. The regulatory notice comes at a time when all eyes are set on Libra, Facebook’s crypto initiative.

The initial deadline was July 31,2019 but has since been moved to a similar date next year. Despite the growing interest in the digital market, not much success has been witnessed in protecting retail investors from fraud. And so, FINRA is committed to monitoring member participation and ensuring firms follow all the applicable state and federal laws.

Previous Notice

In July 2018, FINRA prompted companies to notify the regulator of their activities in the digital market. FINRA also requested for information on future changes the businesses or their related affiliates and persons would make involving cryptocurrencies and other digital tokens. In the report, FINRA asked firms to write to their regulatory coordinator when notifying them of such activities.

Similarly, any material change in an organization’s operations called for the submission of a continuing membership application (CMA) and approval. Unless a change arose, FINRA saw no need for further communication.

According to the updated regulatory notice, below are the activities that firms are expected to disclose;

  • Acquisitions, sales, and transaction executions in digital assets
  • Acquisitions, sales, and transaction executions in pooled funds involving digital assets
  • Acquisitions, sales, and transaction executions in derivatives involving digital assets
  • Possession of digital assets
  • Using distributed ledger transactions (DLT) or any other blockchain technology to register cryptocurrencies and related digital tokens
  • Involvement in secondary and initial offerings of crypto assets
  • Crypto mining
  • Show interest in cryptocurrencies and related digital coins and tokens
  • Acceptance of crypto coins from users
  • Development, provision, and management of consulting services for pooled funds connected to digital assets
  • Clearance and settlement solutions for cryptocurrencies and related digital coins and tokens
  • Propose, request, or take orders in cryptocurrencies or related digital coins and tokens
  • Development and management of platforms dealing with secondary trading of crypto assets

SEC and FINRA Collective Report

FINRA in collaboration with the Securities and Exchange Commission (SEC)  recently issued guidance on broker-dealer control of digital securities. This was in response to the market requests for an explanation on whether such assets fall under federal laws. For them to feature in the securities marketplace, organizations must observe the laws governing securities with particular emphasis on the customer protection rule.

This regulation enhances asset improvement if broker-dealer becomes unsuccessful. According to SEC, this regulation has an almost fifty-year history of recovery for users. Even so, past cyber attacks have tainted the image of this record, therefore, stressing the need to ascertain broker-dealers safeguarding of consumer assets.

What’s more, the statement might present opportunities for traditional entrepreneurs to acquire digital securities. SEC discovered that unregistered firms intending to incorporate digital asset securities into their businesses would first have to list themselves as broker-dealers. However, the approval process calls for patience considering some of the applications have been pending for more than one year. While some claim the SEC delayed accepting entries for companies dealing with digital assets, others believe crypto-related securities contain advanced affairs that regulators must first evaluate.

Financial consultant Matt Comstock said that digital securities would be considered uncertificated as is the case in particular states where a stock’s ownership is supported by electronic records instead of physical certificates. Moreover, the SEC regulation will allow broker-dealers to determine possession through transfer agents. These are official SEC entities responsible for keeping data on the securities` record holders. Although it may take a while before the method is approved, you could also put securities inside wallets managed by broker-dealers using private keys.

FINRA and SEC went ahead to explore the possibility of digital assets falling short of the Securities Investor Protection Act (SIPA) of 1970 conditions for digital securities. According to SEC`s Rule 15c3-3, all broker-dealers ought to hold users` fully paid and surplus margin securities. Alternatively, they could preserve them without lien at a safer controlled location. Oftentimes, securities held in line with SIPA provisions have safeguards for canceling mistaken transactions. Involvement of third parties when dealing with digital assets increases the risk of loss and theft.

Final Thoughts

Some of FINRA’s functions include providing full disclosure of purchased goods to users, ensuring securities products are evaluated, certified and licensed as well as seeing to it that brochures, sites, and ads do not mislead customers. In a bid to fight money laundering, FINRA also ensures firms comply with the U.S. Bank Secrecy Act as well as other applicable anti money laundering (AML) regulations.

 

Featured Image via BigStock.

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