FINRA Addresses Digital Securities – Regulatory Notice 19-24

FINRA Encourages Member Firms to Provide Notice of Activities in Digital Securities

Last year, FINRA took several steps to engage with its members regarding their current and planned activities relating to digital assets. These efforts included the issuance of Regulatory Notice 18-20, which encouraged firms to keep their Regulatory Coordinator informed if the firm, or its associated persons or affiliates, engaged, or intended to engage, in activities related to digital assets, including digital assets that are non-securities. In 2020, FINRA continues to encourage firms to continue keeping their Regulatory Coordinators abreast of  activities related to digital assets until July 31, 2020.

Background & Discussion

In 2018, FINRA undertook a multifaceted outreach initiative to engage with member firms regarding current and planned activities relating to digital assets which includes cryptocurrencies and other virtual coins and tokens (including virtual coins and tokens offered in an initial coin offering (ICO) or pre-ICO), and any other asset that consists of, or are represented by, records in a blockchain or distributed ledger including any securities, commodities, software, contracts, accounts, rights, intangible property, personal property, real estate or other assets that are “tokenized,” “virtualized” or otherwise represented by records in a blockchain or distributed ledger.

FINRA requested that communication be ongoing and asked that, until July 31, 2019, each member keep its Regulatory Coordinator informed of new activities or plans regarding digital assets, including cryptocurrencies and other virtual coins and tokens (whether or not they meet the definition of “security” for the purposes of the federal securities laws and FINRA rules).  Firms that engage in activities related to digital assets, whether or not they are securities, should consider all applicable FINRA rules and federal and state laws, rules and regulations. Further, digital assets that meet the definition of an “investment contract” under Section 2(a)(1) of the Securities Act of 1933 or under Section 3(a)(10) of the Securities Exchange Act of 1934 are “securities” governed by the federal securities laws and FINRA rules, irrespective of whether or not they are labeled as “securities.”

As was the case under Regulatory Notice 18-20, FINRA asks that each firm promptly notify its Regulatory Coordinator if it, or its associated persons (including activities under Rules 3270 and 3280), or affiliates, currently engages, or intends to engage, in any activities related to digital assets. As a reminder, the types of activities of interest to FINRA if undertaken (or planned) by a member, its associated persons or affiliates, include, but are not limited to:

• purchases, sales or executions of transactions in digital assets;
• purchases, sales or executions of transactions in a pooled fund investing in digital assets;
• creation of, management of, or provision of advisory services for, a pooled fund related to digital assets;
• purchases, sales or executions of transactions in derivatives (e.g., futures, options) tied to digital assets;
• participation in an initial or secondary offering of digital assets (e.g., ICO, pre-ICO);
• creation or management of a platform for the secondary trading of digital assets;
• custody or similar arrangement of digital assets;
• acceptance of cryptocurrencies (e.g., bitcoin) from customers;
• mining of cryptocurrencies;
• recommend, solicit or accept orders in cryptocurrencies and other virtual coins and tokens;
• display indications of interest or quotations in cryptocurrencies and other virtual coins and tokens;
• provide or facilitate clearance and settlement services for cryptocurrencies and other virtual coins and tokens; or
• recording cryptocurrencies and other virtual coins and tokens using distributed ledger technology or any other use of blockchain technology.

Until July 31, 2020, FINRA encourages firms to promptly notify their Regulatory Coordinator in writing (including email) of these activities. If a firm already has submitted a continuing membership application (CMA) to FINRA regarding its involvement in activities related to digital assets, or has otherwise provided this information to FINRA, additional notice is not required unless a change has occurred.

For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email to [email protected] or visit www.securitieslawyer101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship.  Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855