Attorney Steven Gatti: “FINRA’s Digital Assets Notice is Sweeping in its Coverage and Raises Important Considerations”

Recently, the Financial Industry Regulatory Authority (FINRA) – the self regulatory organization (SRO) that oversees broker dealers and other financial firms – issued a “Regulatory Notice” on digital assets.

Digital assets, as defined by FINRA, include just about anything associated with blockchain including digital assets that are “non-securities”. It appears that FINRA member firms must report just about anything to do with distributed ledger technology (DLT) in any way. DLT or blockchain is more of a method of management of data that seeks to be more secure and less costly to operate and is expected to be used in many non-securities related functions. While FINRA is encouraging firms to notify them you may be assured this suggestion will be viewed as a mandate as FINRA is not an entity to be trivialized. This Notice will probably impact just about every US financial service firm as they are all reviewing blockchain technology.

FINRA states;

“…each firm promptly provide notification to 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 activities related to digital assets, including digital assets that are non-securities.”

We reached out to Steven Gatti, a DC based partner at Clifford Chance – a global law firm with offices scattered across the world. Gatti is regulatory enforcement specialist dealing with the US Securities and Exchange Commission and other securities regulators. This past Spring, Gatti wrote a paper about ICO (initial coin offering) trading platforms (IE Crypto exchanges) and other digital asset market participants stating his expectation that the SEC’s regulatory and enforcement focus in this area would continue unabated, something that has clearly occurred. 

Gatti said FINRA’s Digital Assets Notice is sweeping in its coverage and raises important considerations for FINRA member firms and, importantly, their affiliates.

Gatti stated;

“First, RN 18-20 seeks expansive information on the non-securities activities of its members, ranging far beyond their mere securities-related activities, by defining ‘digital assets’ as “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 is 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).”

In brief, the mandate from FINRA is quite broad and appears to be borderless.

“Second, in addition to notifying FINRA of its digital asset activities, each member firm is encouraged to notify FINRA about relevant business activities by the member firm’s affiliates,” Gatti stated. “Thus, the Digital Assets Notice seemingly encourages FINRA member firms to provide FINRA with, for example, information about the activities of its US and non-US affiliates in non-securities digital assets.”

Gatti added that although structured as a “voluntary notice program,” member firms should probably take inventory of their enterprise-wide digital asset business activities.

Granted, FINRA is probably trying to figure out how DLT will impact the securities industry not just next month, but five or ten years from now. Questions of systemic risk are always lurking in the background and it is hard to see the next big financial crisis until it smacks you in the face. While many prognosticators, as well as public officials, see great potential in blockchain tech, FINRA is still tasked with regulating their member firms and it appears they have decided to cast a wide digital net in their member diligence.

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