On January 8, 2018, the Financial Industry Regulatory Authority (FINRA) released its 2018 Annual Regulatory and Examination Priorities Letter (Exam Priorities Letter) for its broker-dealer members. In the Exam Priorities Letter, FINRA addresses initial coin offerings (ICOs) and digital currencies, stating the following:
“FINRA will closely monitor developments in this area, including the role firms and registered representatives may play in effecting transactions in such assets and ICOs. Where such assets are securities or where an ICO involves the offer and sale of securities, FINRA may review the mechanisms—for example, supervisory, compliance and operational infrastructure— firms have put in place to ensure compliance with relevant federal securities laws and regulations and FINRA rules.”
Here are a few key takeaways:
- First, this is the initial discussion of ICOs and digital currencies in one of FINRA’s Exam Priorities Letters. This is probably a combination of (1) external forces (for example, the Securities and Exchange Commission, Commodity Futures Trading Commission and other regulators focusing on ICOs and digital currencies) and (2) an increasing number of FINRA members engaging (or considering engaging) in activity involving ICOs or digital currencies.
- Second, and continuing with the theme from the first point, this essentially marks the first time FINRA has issued a statement to its members regarding ICOs and digital currencies. Thus far, FINRA has generally limited its remarks to investor-focused alerts regarding investing in ICOs and crypto-related scams.
- Finally, FINRA refers to cryptocurrencies as “digital assets” (but does not lump ICOs into that bucket) and discusses reviewing the mechanisms firms have in place to ensure compliance with relevant federal securities laws and regulations and FINRA rules where those assets are securities (e.g., supervisory, compliance and operational infrastructure) or where an ICO involves the offer and sale of securities.
As we noted in a recent blog post, 2018 has started with a flurry of regulatory warnings and statements directed at ICOs and digital currencies. FINRA, along with other regulators, will be keeping a close eye on ICOs and digital currencies as they continue to approach mainstream status. By dedicating space to ICOs and digital currencies, FINRA is using the Exam Priorities Letter to place its broker-dealer members on notice that, at a minimum, it will be examining their business, compliance and supervisory practices in this space.