FINRA To Examine Broker-Dealer Crypto Communications – Fin Tech


The Financial Industry Regulatory Authority (“FINRA”)
recently announced that it is conducting targeted sweeps of
broker-dealers concerning their communications about “crypto
assets.” The examination will ask selected firms to provide
all retail communications that were distributed or made available
by the firm or its affiliates between July 1, 2022 and September
30, 2022 concerning “crypto assets,” or a service
involving the transaction or holding of a “crypto asset.”
Notably, the term “crypto asset” appears to target a
broader category of digital assets than what the SEC has identified
as “crypto asset securities.”

The scope of the sweep is broad, and is intended to capture
written and electronic broker-dealer communications that relate to
a wide variety of digital assets, including virtual coins and
tokens. Whether this includes non-fungible tokens
(“NFTs”) is unclear, as the announcement does not
specify. Notably, the announcement states that video, social media,
mobile applications, and websites are generally included as
communications subject to the scope of the review.

The firms selected for the examination will be asked to provide
the following information:

  • The date a relevant communication was first made to the
    public;
  • Whether the communication was previously filed with FINRA’s
    Advertising Regulation Department;
  • Whether each communication was approved by a registered
    principal of the firm, including, if applicable, the date of
    approval; and
  • Each “crypto asset” and/or service involving the
    transaction or holding of a “crypto asset” that the
    communication refers to, relates to, or concerns.

As part of the examination, selected firms will also be asked to
provide written supervisory procedures concerning the review,
approval, record keeping and dissemination of each relevant
communication, as well as any other written guidance that was in
effect during the relevant period, including compliance policies,
manuals, and training materials.

Importantly, the examination also targets the crypto marketing
activities of firm affiliates. As such, firms selected for the
review will be asked to provide information related to the
affiliate’s role in disseminating any relevant
communication.

FINRA’s announcement comes as state and federal regulators
continue to search for the best ways to regulate the digital asset
industry. In the absence of a comprehensive national regulatory
scheme for digital assets, federal agencies such as the SEC, the
CFTC, and the IRS, have all independently taken oversight and
enforcement roles. While federal regulators attempt to define their
own place in policing the crypto industry, some state regulators
have attempted to fill this void by implementing their own
regulatory regimes.

For example, the New York Department of Financial Services
(NYDFS) BitLicense framework requires individuals or firms
conducting virtual currency businesses in New York State (including
buying or selling digital assets, or performing exchange services)
to complete a detailed application, which requires the submission
of financial records, the establishment of compliance programs, and
information pertaining to the entity’s owners and operators.
Recently, NYDFS Superintendent Adrienne Harris touted the success
of NYDFS’ regulatory program, and noted that any federal
regulatory scheme should look to NYDFS for guidance. Superintendent
Harris stated, “[w]e would like for there to be a framework
nationally that looks like what New York has, because I think it is
proving itself to be a very robust and sustainable
regime.”

New York has been among the most active states regarding crypto
regulation, and just last week announced a two-year moratorium on
new fossil fuel-powered crypto mining operations, an activity that
has become popular in the state due to the number of former power
plants and manufacturing sites that already have electric
infrastructure in place. The energy intensive mining operations
have come under scrutiny in New York at a time when the state
attempts to limit its carbon footprint.

For its part, the IRS, which treats digital currency as
“property” for federal tax purposes, has recently used
John Doe summonses to target unidentified taxpayers with accounts
at third-party cryptocurrency exchanges. When cryptocurrency
exchange firms receive these summonses, they are compelled to
provide information to the IRS pertaining to the relevant customer
accounts. Through these summonses, the IRS has taken a proactive
enforcement approach to ensure that individual buyers and sellers
of digital assets are not underreporting their tax liabilities.

The IRS has also been involved in a number of cases related to
digital…



Read More: FINRA To Examine Broker-Dealer Crypto Communications – Fin Tech

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