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.
So, we see firms indirectly involved in crypto business lines through arrangements with third-parties or affiliates in order to facilitate trading in crypto assets. And in these instances of indirect exposure, we focus on the member firm’s part in whatever arrangement is in place. That said, for our members that are directly engaged in ATS business or private placements and customer facilitation, it’s really important that they understand the risks unique to those business lines and the controls they need to put into place to mitigate those risks. Additionally, on the market surveillance front, FINRA investigates situations where bad actors are seeking to take advantage of investor interest in crypto assets and blockchain technology to perpetrate pump-and-dump schemes and other forms of market abuse in the equity markets.
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.
FINRA has been regulating crypto asset activities of our member firms for quite some time now. And currently, there are 26 member firms approved solely to engage in crypto asset securities business. Now the crypto asset market is seeing explosive growth and product expansion despite the recent downturn. And FINRA is committed to continue adapting our regulatory programs to protect investors in this highly dynamic environment. And as you said earlier, An Inside Look Into Finras Crypto Asset Work Kaitlyn, this will be the subject, I think, of a future podcast. So, for example, consistent with the requirements that have been set out by the SEC in that December 2020 statement regarding the custody of digital asset securities by SPBDs, an SPBD must operate in accordance with several SEC requirements that limit the scope of its operations and the assets for which it can provide custody service, namely to crypto asset security, specifically.
6 See the Report’s Communications With the Public topic for findings and effective practices concerning crypto asset-related retail communications. 1 See the Private Placements topic for additional findings and effective practices relevant to crypto asset-related private placements. Registered representatives can fulfill Continuing Education requirements, view their industry CRD record and perform other compliance tasks. The promise and the risks involved in crypto are undergirding the Hub’s work as it works with FINRA’s Blockchain Lab, Crypto Asset Surveillance Team and its standard Examination team. 2 See the Report’s Outside Business Activities and Private Securities Transactions topic for additional findings and effective practices applicable to reviewing and supervising crypto asset-related OBAs and PSTs. Compliance News is a website dedicated to keeping securities compliance professionals up-to-date and well informed.
Arbitration and mediation case participants and FINRA neutrals can view case information and submit documents through this Dispute Resolution Portal. FINRA Data provides non-commercial use of data, specifically the ability to save data views and create and manage a Bond Watchlist. Player FM is scanning the web for high-quality podcasts for you to enjoy right now. The crypto market has rapidly grown over the last decade, with a current capitalization of just north of $1trn, down from a high of approximately $3trn in 2021.
It has also included instances of bad actors exploiting the crypto market to steal significant sums from investors – from smaller pump-and-dump schemes to larger and longer-running ones – such as the fraudulent raising and misuse of funds that led to the collapse of asset trading platform FTX. So again, back in 2018, and I think what was different about that group and what we’re doing now with CAI is that the Digital Asset specialist team was a non-dedicated group, which really just meant that the people on that team also maintained our normal roles within Member Supervision. And then we would conduct the crypto-related reviews alongside our dedicated roles. But with CAI now, we are full-time staff members that are solely focused on the crypto-related work that we’re doing.
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. This training program, more so than a lot of the other projects that are ongoing, is one that we expect to continue to pay dividends for FINRA as we think about building up our capacities and enhancing our abilities to fulfill our regulatory mission with respect to crypto assets. FINRA is engaging with state, federal, and international regulators and agencies to discuss crypto asset regulatory efforts and developments, as well as with member firms and other industry participants. A special summit attended by crypto asset subject matter experts from FINRA and the National Futures Association is one example of this collaboration. And each of these departments has at least one subject matter expert represented on the Hub.
- We are looking to what the states are doing, what federal agencies are doing, what other SROs are doing and what legislation may come.
- FINRA is engaging with state, federal, and international regulators and agencies to discuss crypto asset regulatory efforts and developments, as well as with member firms and other industry participants.
- But I think if you pay attention to the news, there are some questions about what it means to actually segregate customer assets, what it means to know what your customers are doing and what it means for AML controls when you have crypto assets moving in a way that we’re not typically used to seeing.
- This growth has included increased product offerings, retail investor participation (especially among younger investors), and related activities by our member firms.
- And each of these departments has at least one subject matter expert represented on the Hub.
Rather, this update poses questions for firms to consider as they review and supervise their retail communications concerning Crypto Assets. Member firms may consider the information in this update in developing new, or modifying existing, policies and procedures that are reasonably designed to achieve compliance with relevant regulatory obligations based on the member firm’s size, business model, or practices. See how FINRA’s crypto asset regulatory program is evolving to protect investors and promote market integrity. Having that collaboration helps us to come into those meetings and really have good conversation with firms about what they’re doing.
But I think if you pay attention to the news, there are some questions about what it means to actually segregate customer assets, what it means to know what your customers are doing and what it means for AML controls when you have crypto assets moving in a way that we’re not typically used to seeing. The crypto market has rapidly grown over the last decade, with a current capitalization of just north of $1 trillion, down from a high of approximately $3 trillion in 2021. This growth has included increased product offerings, retail investor participation (especially among younger investors), and related activities by our member firms. In some instances, bad actors have exploited the crypto market to steal significant sums from investors, such as through phishing scams seeking payment in cryptocurrency and fraudulent offerings.
This website is using a security service to protect itself from online attacks. There are several actions that could trigger this block including submitting a certain word or phrase, a SQL command or malformed data. And so, firms moving into this space is an opportunity for us to collaborate as they go to the Membership Application Program, to explore an application to add those services to their membership. It gives us a great opportunity to keep ahead of what’s happening and really prepare for those changes as they start to unravel within our membership.
And finally, I’d be remiss if I didn’t point out how incredible it is to watch the organization embrace the strategy I outlined today and see firsthand how dedicated, collaborative and innovative our employees are in this space. Also coming up with some frequency is the supervision rule, which is FINRA Rule 3110. And this is for failures to conduct due diligence on crypto asset private placements. And this is an area where we’re very much focused, given also, the risk of fraudulent offerings.
We’ve also looked at our technology needs and are actively assessing and developing new investigative tools specific to crypto asset activities in order to enhance our capabilities in that area. The Blockchain Lab that Omer mentioned earlier is one of the leading groups within FINRA on that front, and I don’t want to spoil the future podcast on that one, so I’ll just encourage the audience to tune in to that future episode to hear more about the ongoing work that they’re helping to lead internally here at FINRA. We’ve also engaged in a broad effort with our partners in market regulation and transparency services to assess and, where needed, enhance FINRA’s market surveillance capabilities with respect to crypto assets. And the third objective is to engage in blockchain innovation to support and enhance FINRA’s regulatory capabilities across all product types, including crypto assets, as well as exploring the utilization of blockchain solutions in financial applications. And so, to accomplish this objective, FINRA established the Blockchain Lab within the Office of Financial Innovation, whose mission is to work in partnership with Reg Ops, which, I believe, Kaitlyn, has been a subject of a previous podcast, and refers to our operational departments, which are Member Supervision, Enforcement and Market Regulation.
We also work closely with the Corporate Finance Department and with Advertising Regulation in that, Corporate Finance is reviewing private placement filings that are submitted to FINRA and Advertising Regulation is reviewing communications. I think there’s some discussion previously about Advertising Reg’s sweep related to crypto asset communications, and so that very much impacts us and their findings will impact what we’re doing in the future. So, we keep a close eye on what they are doing in that space and just try really at all times to help other departments as we learn new things. 1For purposes of this update, a crypto asset is an asset that is issued or transferred using distributed ledger or blockchain technology, including, but not limited to, so-called “virtual currencies,” “coins,” and “tokens.” A particular crypto asset may or may not meet the definition of a “security” under the federal securities laws. Additionally, the communication methods and terminology used in the crypto ecosystem can be unique.
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