Why Is FINRA Frustrating Approval Requests For 40 Digital Assets Securities Startups?
The current cryptocurrency and blockchain climate is pretty interesting. There’s so much happening right now that everyone naturally seems to want a piece of the pie. 2019 has been a good year bitcoin for example and there is a lot more recorded investment – both individual and institutional – than there used to be in times past. There’s the Binance incubation program and there’s also Ripple Labs both of whom are spending a lot of time and Resources to help nurture and grow many up-and-coming startups focusing cryptocurrency and blockchain technology.
However in all this excitement as many as 40 different startups seeking to trade tokenized securities have been stifled because they’ve been waiting for approval from U.S. authorities. According to reports, the Financial Industry Regulatory Authority (FINRA) which is a self-regulatory organisation (SRO), has been reluctant to approve more than a few startups for quite a while now. At the moment, there’s a lot of speculation but nobody is exactly sure why this is happening as some of these startups have been waiting for up to a year and some as long as 14 months.
Some people who are clearly unhappy with the state of things have opined that FINRA is doing this deliberately because they have placed a quiet and unofficial Embargo on the registration of some of these startups. There are also those who think that the reason for the hold-up is connected to the securities and exchange commission(SEC) believing that they are exploiting the fact the proper classification of some digital assets, especially as securities, haven’t been very straight forward. There are also others who think the FCC is directly making FINRA postpone all approvals until further notice.
However, as unpalatable as the situation is, not everyone is pessimistic. There are some who believe that the hold-up is a bit inevitable because this class of assets are relatively new and this has been corroborated by Ray Pellecchia, the director of Media relations for FINRA. Whatever the reason is, the affected startups are quite unhappy about the development.
According to Pellecchia:
“Membership applications from firms proposing to engage in digital asset businesses present new, complex issues and we are in the process of working through them.”
The Nascent Cryptocurrency Climate
Digital assets have been around for more than a few years now. However, especially when compared to other global financial markets, it still is relatively new. Some of the affected startups are looking for a way to become officially recognized broker-dealers so they can let the average customer join the cryptocurrency sphere using digital assets that are officially classified as securities. This is however not a walk in the park because before they can start, they have to submit to authorities for approval.
FINRA is one of the regulators these new firms must go through as one of its functions is to grant approvals to broker-dealers and also authorise official representatives. However, since FINRA is an SRO, it is still under the authority of the SEC.
FINRA Is also at the helm of affairs because before any firm can be qualified custodians or players in the alternative trading systems (ATS), it is compulsory that they must first be approved as broker-dealers.
Some cryptocurrency exchange firms are also interested in becoming qualified custodians so that they can serve as middlemen, keeping crypto assets for institutions who are unable to do this for themselves. Some exchanges that are authored as qualified custodians include Coinbase, Gemini and BitGo. With these three firms however, things were done a little differently as BitGo was authorized by the South Dakota division of banking while the New York Department of Financial Services was responsible for licensing both Coinbase and Gemini. FINRA was completely bypassed.
Is There Really An Unofficial Ban?
At the moment, it would seem that many people are sure that the hold-up might stem from deliberate actions against the rise of tokenized securities. A concerned attorney representing one of the affected firms has said that there have been a lot of conversations between FINRA and the SEC but it still doesn’t look like anything will happen soon. The attorney also said the SEC’s concern with manipulation and fraud in the cryptosphere is a big problem.
“On the one hand, you have the SEC complaining that there’s all this market manipulation and bad actors, but they won’t let good actors come in and clean things up.”
The lawyer also said that they don’t think there’s anything they haven’t tried.
“We’re at a stage where we’ve provided absolutely everything we can [and] they’re not requesting anything else from us. They’re just saying they can’t approve because they’re uncomfortable with this asset class.”
This situation has forced this particular client to consider continuing their business outside of the U.S as the attorney was quoted saying “…if we have to exclude U.S. citizens and U.S. companies and share our skills abroad, then that’s what we’ll do.”
This isn’t the first time the difficulty of regulations in the U.S has been pointed out. Last year, a Law and Technology Official at Consensys – Joyce Lai – specifically said that there would be a lot more related projects if the laws and regulations were a tad more lucid.
She has also said that:
“Regulatory clarification, or a lack thereof, is a huge hindrance that can weigh heavy on the minds (and potential purse strings) of founders.”
Is The SEC A Bigger Problem Than FINRA?
As stated earlier, no one is exactly sure what the problem is but many believe that even though FINRA might be a tough nut to crack, the major problem is the SEC itself. For the most part, the FINRA can conduct its business independently but the SEC is still legally allowed to override FINRA.
Even people who aren’t directly affected by the hold-up believe that the SEC is the problem. According to one of such persons:
“A lot of times FINRA are the people in the system that are slowing things down but in this case, what I’ve heard is that FINRA is waiting for clarity from the SEC so they can move some of these things forward and they’re actually being quite cooperative on working with people.”
Other Plausible Opinions
There are many who believe that the idea that there is some embargo is unlikely because there are a few firms who have successfully been approved by FINRA. These people think that the current problem might be attributed to the specific features of the digital assets submitted to FINRA.
Some of the Alternative Trading Systems (ATS) which received approval include OpenFinance, SharesPost, tZERO, and Templum Markets. These firms were approved last year causing a few people to believe that there is no real embargo.
No Resolve Anytime Soon
Even with all the complaints, it’s still very unlikely that the problem will see a resolution any time soon. One of the arguments in support of FINRA is that its responsibility, before it gives any approval, requires that it does a thorough scrutiny of all the firms including the owners and management, its proposed client base, its experience in the sector, financing and how it intends to source for funds and also what funds it currently has.
Because these things involve cryptocurrency and an audience that is on the internet (which means there can’t really be any fixed description), it might not be surprising that the process is taking a lot of time.
Under normal circumstances, FINRA has a deadline for either approval or disapproval which is six months. However, FINRA is still legally allowed to lengthen this deadline if it needs to.