FINRA AND the NASAA watching cryptocurrency hype

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FINRA AND the NASAA watching cryptocurrency hype

Cash may be king, but virtual cash is emperor! As cryptocurrencies continue to garner national and international headlines, everyone is watching the sector carefully. Including the regulators.

Just last week, the North American Securities Administrators Association (NASAA) and the Financial Industry Regulatory Authority both advised investors and their advisors to tread carefully in the wild, wild west of virtual currencies. It’s important to “go beyond the headlines and hype to understand the risks associated with investments in cryptocurrencies, as well as cryptocurrency futures contracts and other financial products where these virtual currencies are linked in some way to the underlying investment,” says NASAA President and Director of the Alabama Securities Commission Joseph Borg.

Bitcoin, Ethereum, and Litecoin are the current belles of this medium of exchange created and stored electronically in the blockchain, a distributed public database that keeps a permanent record of digital transactions. But despite the “permanent” record of those digital transactions, the regulators warn that unlike conventional currency, virtual coinage has no physical form and typically is not backed by tangible assets. Nor are they insured or controlled by a central bank or other governmental authority, and they cannot always be exchanged for other commodities. They are subject to little or no regulation.

Are virtual currencies a haven for fraudsters?

In a recent NASAA survey of state and provincial securities regulators, 94 percent report they believe there is a “high risk of fraud” involving cryptocurrencies. And they are unanimous in their view that more regulation is needed for cryptocurrency to provide greater investor protection.

“The recent wild price fluctuations and speculation in cryptocurrency-related investments can easily tempt unsuspecting investors to rush into an investment they may not fully understand,” Borg notes.

Last month, NASAA identified Initial Coin Offerings (ICOs) and cryptocurrency-related investment products as emerging investor threats for 2018. Unlike an Initial Public Offering (IPO) where a company sells stocks to raise capital, ICOs sell “tokens” to fund a project, usually related to the blockchain. Where it gets interesting, is that the token likely has no value at the time of purchase. Some tokens constitute, or may be exchangeable for a new cryptocurrency to be launched by the project, while others entitle investors to a discount, or early rights to a product or service proposed to be offered by the project.

Who’s regulating virtual money?

The NASAA for one. And FINRA, too, is getting in on the action. As part of its 2018 Priorities, the Authority says it will closely monitor developments in the sector, 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.

What makes the regulators nervous about cryptocurrencies?

  1. Lack of regulatory oversight. Plus, cryptocurrency is susceptible to cybersecurity breaches or hacks, and there likely is no recourse should the cryptocurrency disappear.


  1. Cryptocurrency accounts are not insured by the Federal Deposit Insurance Corporation (FDIC).


  1. High volatility makes cryptocurrencies unsuitable for most investors.


  1. Not all advisors are equal. Cryptocurrency investors are highly reliant upon unregulated companies, including some that may lack appropriate internal controls and may be more susceptible to fraud and theft than regulated financial institutions.


  1. Cryptocurrencies are easy to steal. Investors are dependent on the strength of their computer security systems, or security systems provided by third parties, to protect purchased cryptocurrencies from theft.

Are virtual currencies ripe for fraud?

The regulators think so, particularly given that most are offered by unregulated entities. Savvy compliance professionals should consider whether members are scrupulously dotting their “i”s and crossing their “t”s and not:

  1. Advertising “guaranteed” high investment returns.


  1. Making unsolicited offers.


  1. Using marketing materials that make the investment sound too good to be true. Particularly watch out for exaggerated claims about the project’s future success.


  1. Invoking high-pressure sales tactics, urging clients to “act fast,” or “get in on the ground floor of a new tech trend.”


  1. Unlicensed sellers.


There is no upside to being the last to know what your people are up to. And virtual currency is just another layer added to your compliance burden. You cannot lock your people in their offices, and even a perfect system can be vulnerable. So, let’s talk about how you can keep your organization on the “straight and narrow” in the real world and the virtual. Call 212-233-1155 to ask about Patrina’s cost-effective and comprehensive, 8-module compliance solution, and compliant data capture, file storage, and records archiving specifically designed for the financial services community. Be smart. Be covered.