Does FINRA Regulate Cryptocurrency?

12 February, 2024

Since there is a lot of money to be made in cryptocurrency, broker-dealers have used less than wholesome tactics. Young investors use cryptocurrencies as an entry point into the market, and vigorous regulation is crucial to protect them.

FINRA does not have dedicated rules that apply just to cryptocurrencies. However, FINRA does oversee cryptocurrencies, considering they fall within the current regulations.

FINRA has devoted some forethought and bandwidth to this issue, especially in light of some of the illegal conduct in this industry. If you have lost money in cryptocurrencies due to your broker’s misconduct, contact the attorneys at Rikard & Protopapas to learn about your legal rights.

FINRA Regulates the Actions of Registered Representatives

Cryptocurrencies are considered to be a commodity under the Commodities and Exchange Act. Firms that sell these investments must be registered with a self-regulatory organization, of which FINRA is one.

Although FINRA does not per se regulate cryptocurrency, they do regulate the conduct of member firms and their registered representatives. Registered representatives and member firms are held to the same standard in any type of securities transaction. As an investor, you have the right to expect that the members abide by principles of just and equitable trade.

Not every broker is allowed to conduct a cryptocurrency business. FINRA follows SEC rules in that the broker must have special approval to conduct this business. As of August 2023, there were 26 firms approved by FINRA to conduct a cryptocurrency business.

In addition, FINRA also requires its members to notify the regulator if they conduct business in non-securities that are related to crypto. FINRA wants to know if there are any “touch points.” In many cases, a FINRA member has an affiliate or a third party to which it refers its members — FINRA may not have jurisdiction over those third parties.

FINRA Is Ratcheting Up its Regulatory Efforts in Crypto

Much of FINRA’s early steps involved learning more about the cryptocurrency market, so it could properly regulate. FINRA seems to have made great strides in the past several years. However, a rapidly changing business also means continuous new challenges for regulators.

FINRA maintains a special team, with its subject matter experts, to examine the industry. Crypto asset investigations require specialized knowledge, due to their complexity. This team may review complaints about broker misconduct in crypto transactions. They may also conduct risk-based examinations of member firms.

Now and then, FINRA conducts targeted examinations of firms that transact in crypto assets. For example, in November 2022, FINRA conducted a targeted exam of retail communications that member firms send regarding digital assets. In particular, FINRA was focused on how member firms advertise cryptocurrencies.

Potential Rule Violations for Brokers Transacting in Cryptocurrencies

FINRA also takes enforcement actions against registered representations for wrongful business practices. In 2018, FINRA’s first cryptocurrency enforcement action was securities fraud and the unlawful distribution of an unregistered cryptocurrency security called HempCoin.

According to FINRA, their investigations into cryptocurrency have found violations of the following rules:

  • Rule 3110, which requires broker-dealers to supervise their registered representatives (this is a common violation in any investigation, and the way that firms are held accountable for what their brokers do)
  • Rule 3270 and 3280, when representatives either sold away or engaged in a personal transaction
  • Rule 3310, when firms do not have policies in place to prevent money laundering (which is critically important when digital assets are involved)

FINRA is also investigating potential violations of Rule 2210. Members have been inundating the public with advertising, especially as cryptocurrency has gained in popularity. According to FINRA, these advertisements may not have properly described the risks

FINRA Arbitration Claims for Cryptocurrency Losses

In any new financial product or industry, there are always those who bend or break the rules to make money at your expense. The same FINRA rules that apply to any other type of transaction also apply to cryptocurrency.

For example, brokers cannot make false claims in the sale of any financial product, including crypto. If the broker has violated the rules, and it caused you to lose money, you can file a FINRA arbitration claim against them.

Although the rules may be clear, FINRA itself is still learning about cryptocurrencies. The innovative nature of digital assets makes the arbitrator selection phase of your case even more crucial. Our attorneys help screen the potential arbitrators in your case, so we can agree with the other side on the best possible one for you.

What to Do When You Believe Your Broker Caused You Cryptocurrency Losses

If you believe that you have lost money on a cryptocurrency investment, you should do two primary things:

  • Report the conduct to FINRA, so it can investigate and take enforcement action.
  • Hire an experienced attorney to help you with the arbitration.

How Rikard & Protopapas Can Help You

You need an attorney to help protect your rights as an investor when they have been taken from you. At Rikard & Protopapas, our attorneys can do the following in your case:

  • Investigate what happened and help you determine whether any FINRA rules or securities laws were violated.
  • Begin to build the evidence that will support your claim.
  • File your arbitration claim with FINRA.
  • Engage in the discovery process, as provided for by FINRA rules.
  • Negotiate a potential settlement before the hearing.
  • Present your case in front of the FINRA arbitrators.

Although arbitration is more streamlined than litigation, it does not mean that fighting a broker will be easy, especially when they are pulling out all the stops to defend themselves.

Contact a FINRA Arbitration Attorney Today

If you have lost money in any transaction, and you believe that your broker’s misconduct was responsible for it, you may have grounds for a potential arbitration claim.

The attorneys at Rikard & Protopapas know how to take on brokers, and we believe in getting justice for our clients. You can schedule a free initial consultation when you send us a message online or call us today at (803)-805-7546.



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