FINRA Finds Cryptocurrency Dealings Widespread Among Brokers

Nearly 400 broker-dealers across the country have operations in crypto assets, according to a new report from the Financial Industry Regulatory Authority (FINRA). While the report doesn’t draw conclusions on that statistic, it notes previous warnings it has issued about firms’ involvement in crypto assets, particularly those that aren’t registered as securities, thus operating on the edge of regulatory oversight.

“FINRA continued to develop a detailed understanding of member firms’ cryptoasset activities to inform and improve FINRA’s regulatory operations regarding these activities,” the self-regulatory organization said in the report, released Aug. 13. “FINRA also sought to understand the ways in which member firms were connected to the broader cryptoasset industry to enable FINRA to quickly assess the impact of future cryptoasset-related events on member firms.”

FINRA identified 390 firms involved in crypto activities among nearly 600 member firms to which a questionnaire was sent.

These reported links are very diverse and include outside business partners, representatives, or parent companies affiliated with digital currencies or a cryptocurrency company. Reported activities also include cryptocurrency trading, mining, and crypto fund management.

The findings, coupled with FINRA’s response in issuing notes and guidance on crypto assets, appear to demonstrate a new phase for the emerging world of digital assets, which is being viewed more as an asset class and less as a new risky investment.

“FINRA’s regular rule and guidance updates indicate that cryptocurrency is becoming more mainstream,” said Damon Polistina, director of research at crypto platform SMA Eaglebrook. “As regulators begin to view cryptocurrency as a pure asset class, investors will likely begin to accept it as well.”

But there is some question about whether regulators are really comfortable with cryptocurrencies. FINRA and the U.S. Securities and Exchange Commission (SEC) have spent years gathering information to determine where cryptocurrencies fit into the securities space and how to supervise cryptocurrencies, while also implementing enforcement measures.

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FINRA noted in the study a handful of previous actions and notices, the most recent of which include potential violations and a January 2024 update to its rule on how firms communicate with the public about their crypto-asset activities; as well as firms failing to adequately oversee cryptocurrency trading activities.

“As this market has grown and interest in crypto assets has increased, so has the potential for harm from problematic communications,” Ira Gluck, FINRA’s senior director of advertising regulation, said at a news conference. FINRA Podcast in January, regarding an “investigation” the agency conducted months earlier into how companies communicated with the public about crypto assets.

“Before the fraud wave, we were seeing a non-compliance rate for crypto asset filings of about 40%, compared to about 8% for all products,” he said. “Customers can also be misled if the communication falsely states or implies that the SEC or FINRA has approved or guaranteed a particular crypto asset. For investors to have enough information to evaluate a crypto asset investment or service, communications must clearly describe the risks and features of the product.”

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Separately, the SEC has issued regulations on cryptocurrencies in recent years aimed at identifying which digital assets are securities and approving certain exchange trading platforms. Since early 2023, the SEC has also issued dozens of enforcement actions related to cryptocurrency companies and exchanges. Most recently, the SEC won its first lawsuit against cryptocurrency company Terraform Labs PTE and former CEO Do Kwon, in which the defendants agreed to pay more than $4.5 billion fines and penalties in June 2024 for cryptocurrency fraud.

“In response to this disruption and widespread noncompliance, we have redoubled our enforcement efforts,” SEC Enforcement Director Gurbir Grewal wrote in an epilogue published on July 2, 2024 “In short, my tenure as director has coincided with extreme volatility and risk for investors in the cryptocurrency markets,” he said in a speech he gave last year.

The SEC reported that the number of investor complaints about cryptocurrencies submitted to its Office of Investor Education and Advocacy increased from 820 in 2019 to 5,357 complaints in fiscal year 2023.

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The cryptocurrency market has been around long enough to have seen the collapse of some of its major players, significant losses and gains for investors, and enough enforcement actions to have reduced investors’ appetite for risk.

A Pew Research Center survey in 2023 found that 43% of respondents who said they had invested in cryptocurrency have little or no confidence in its security. Motley Fool Ascent’s 2024 Crypto Investor Trends Survey A study published in May declared that “cryptocurrency is on the rise again,” with 43% of respondents saying they were somewhat likely or very likely to purchase cryptocurrencies in the next year.

“As more advisors understand that there is a way to allocate funds to digital assets within FINRA guidelines, it makes sense for them to become more involved in this asset class,” Polistina said. “An acceptance inertia effect could emerge.”

However, the Motley Fool report also found that among respondents who said they had never owned cryptocurrency, 83% said they were unlikely to buy crypto in the next year, indicating a lukewarm appetite for crypto among newcomers.

“In summary, the cryptocurrency markets remain fast-moving, volatile, and, in my view, risky for investors,” Grewal said last month. “The Enforcement Division has acted with urgency and will continue to do so to fulfill its mandate to protect investors in these markets.”