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.
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.
And lastly, I think we really pay close attention to what’s happening in other agencies. We are looking to what the states are doing, what federal agencies are doing, what other SROs are doing and what legislation may come. So, we are up to date with all of those changes as we hear about them very frequently.
When firms fail to establish reasonable AML programs, when the crypto asset activities are occurring by, at, or through the member firm. We learn more about this dedicated group of investigators specializing in conducting complex crypto asset investigations and the crucial role it plays in ensuring compliance with existing rules and regulations in the crypto asset space. FINRA follows the SEC’s guidance in assessing a firm’s proposed digital asset securities business line under applicable rules, such as the SEC’s financial responsibility rules and customer protection rule. So, I really think it’s important for firms to either directly or indirectly have some exposure to crypto asset business lines to take a look at their controls to mitigate those risks in this space as we’re seeing not necessarily indicative of having the crypto business line.
At the same time, FINRA is engaged in a variety of initiatives designed to build for the future and enhance our capabilities. Key aspects of this work are our efforts to engage with other state, federal, and international regulators and agencies to discuss crypto asset regulatory efforts and developments, as well as our efforts to engage with member firms and other industry participants to better understand current crypto asset activities and issues. A special summit attended by crypto asset subject matter experts from FINRA and the National Futures Association is one example of this work. We recently formed a dedicated crypto asset surveillance team that’s going to be leading our efforts on this front in coordination with different groups across the organization and with the Hub. There’s so much going on right now at FINRA with respect to crypto assets, I certainly can’t cover all the incredible work that’s being done across the organization in such a short amount of time.
And then lastly, another area of focus from a fraud perspective for CAI is misrepresentations and omissions of material facts regarding crypto assets or the crypto asset exposure that’s being offered or provided by a firm or a rep to customers. So, considering crypto-specific risks and ensuring those risks are balanced with the discussion that’s happening on potential rewards of an offering or of a service that’s being offered, for example, and then also ensuring that a review of some sort is conducted to assess whether statements appear to be exaggerated or unwarranted, for example. I think we do want to acknowledge that these fraud risks probably sound familiar to other more traditional business lines. But I do think that when crypto is involved, some aspects are unique because crypto assets have different features than tradfi. I’ll note here that these business lines are represented in FINRA’s membership, both directly and indirectly, meaning some firms, mostly firms operating in an alternative trading system, or ATS, or firms offering crypto private placements, are directly engaged in crypto business activities.
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.
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.
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.
And, as Jason said, he’s the Chief of the Hub and he’s like the conductor of an orchestra, who works with the various department program managers represented on the Hub to orchestrate strategy, communication, coordination and cross-enterprise crypto asset projects comprising the overall program that, together, realize our strategic goals and objectives. This update summarizes initial themes from this targeted exam and poses questions for firms to consider if they use retail communications concerning Crypto Assets. This update does not create new legal or regulatory requirements or new interpretations of existing requirements, nor does it relieve firms of any existing obligations under federal securities laws and regulations.
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.
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.
- 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.
- FINRA has been regulating crypto asset activities of our member firms for quite some time now.
- So, we are up to date with all of those changes as we hear about them very frequently.
And the Blockchain Lab will also partner with our technology department and the Crypto Hub to develop blockchain-related regulatory initiatives, identify new technology opportunities and build blockchain expertise. FINRA requires approval by its Membership Application Program for firms’ material crypto asset securities business lines. Firms seeking approval for such a business line must provide specified information to FINRA and meet the applicable requirements under the securities laws and FINRA rules. So, I think some controls to consider with this misappropriation of asset risk with crypto assets specifically are to get a strong understanding of who has access to the private keys used in offerings, establish strong cyber and operational controls to govern how and when crypto assets are being accepted, stored and accessed.
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.
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