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FINRA to Examine Broker-Dealer Crypto Communications

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 assets.  One of those cases, involving a Tennessee taxpayer’s challenge to the IRS’s determination that cryptocurrency generated through a staking was taxable income, was recently dismissed as moot following the issuance of a full refund by the IRS to Plaintiffs.  In that case, Plaintiffs had reported $9,407 in “other income” on their 2019 tax-return related to tokens that were generated as a result of Plaintiffs’ cryptocurrency staking operation.  Last week, however, Plaintiffs filed a Notice of Appeal pertaining to the Court’s dismissal of the action. 

Currently, there are many state and federal agencies involved in the regulation of digital assets.  However, until a more robust national regulatory scheme is adopted, oversight of the digital asset industry will be covered by a patchwork of federal and state regulatory schemes, each with its own intricacies and nuances.  This lack of a cohesive national regulatory regime and accompanying standards will continue to frustrate those in the industry looking to “play by the rules,” and in light of recent market events, may also exacerbate the current “crypto winter” and inhibit growth and institutional investment.

©1994-2023 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.National Law Review, Volume XII, Number 335
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About this Author

Cory Flashner White Collar Defense Attorney Mintz
Member

Cory is a white collar defense attorney and former federal and state prosecutor whose practice encompasses representing individuals and companies in investigations and enforcement actions related to financial laws and advising them on compliance. He has particular experience with securities laws, anti-money laundering laws and regulations and primarily serves clients in the financial services sector.

Prior to joining Mintz, Cory was a vice president and the regional head of the anti-money laundering (AML) division for North America at a Boston-...

+1.617.348.1605
Edmund Daley Complex Litigator Mintz Boston Law Firm
Associate

Ed represents clients in complex litigation across a wide variety of areas including commercial litigation, white collar defense, internal investigations, fiduciary litigation, financial services litigation, and real estate litigation. He has experience preparing and arguing motions in state and federal court cases. Ed is also an active member of the firm’s appellate practice group, advising clients on all aspects of appellate strategy.

Prior to joining Mintz, Ed served as a law clerk to the Hon. David A. Lowy of the Supreme Judicial Court of Massachusetts, assisting him with legal...

617.348.4921
Christopher E. D'Aliso Associate Mintz
Associate

Christopher focuses his practice on insurance coverage disputes and other complex commercial litigation in federal and state courts. He has experience drafting motions and memoranda and assisting with depositions and discovery.

Prior to joining Mintz, Christopher was an associate at an international law firm, where he defended clients in insurance disputes and other commercial cases.

While earning his JD, Christopher served as a judicial intern to the Honorable Sherry R. Fallon, Magistrate Judge of the US District Court...

212-692-6822
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