Practical Considerations for Firms with Clients in the Digital Assets Markets

By Bill Reilly

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As the popularity of digital assets/distributed ledger technology piques the interests of investors worldwide, firms registered with the SEC, FINRA, CFTC, NFA and the states must be prepared to determine if and how much they are interested in permitting their clients to participate in the volatile digital asset market. If so, as with all other products and services, firms must address certain considerations as they evaluate their involvement in these products.

Registered firms and individuals (and eventually their clients) must consider the following when determining whether to offer digital assets to their clients:

  • Is the digital asset a security or commodity, and is it required to be registered? If so, is the product already appropriately registered? If not, how does that impact risk?
  • Does the issuer have a bonafide business plan?
  • Has the firm’s policies and procedures section dealing with product due diligence, either outright or with restrictions, approved participation by firm clients in the digital assets/distributed ledger market?
  • Firms are required to have Specific Supervisory procedures for complex and high-risk products, or products with limited transparency. Many digital assets would likely fall within this category. Will your firm have Specific Supervisory procedures in place?
  • Firms have developed matrices for percentages of complex products and high risk investments comprising an account portfolio based upon certain factors including age, investment objectives, liquidity and risk tolerance. Firms should combine digital assets with a current matrix or establish an updated matrix.
  • Some digital asset firms indicate secondary markets are readily available to liquidate investments. However, digital assets can be illiquid investments. Is the client suitable for this type of investment? Are certain clients based upon age, investment objectives, time horizon, risk tolerance, income and net worth prohibited from purchasing digital assets?
  • Digital assets are volatile with prices varying widely in a short period of time. Do the firm’s procedures for suitability address customer-specific requirements for this type of investments?
  • Is there an active mechanism/exchange for the assets, and is the trading transparent? What agency or organization, if any, has the authority to regulate the exchange/trading platform?
  • Registered firms are required to have business continuity plans. Does your firm’s business continuity program cover trading of digital assets, and has it been tested?
  • Firm AML programs should be reviewed to determine if enhancements are necessary as . the digital asset industry has been shown by regulators to be ridden with fraudsters and attractive to unscrupulous “players”.
  • Digital asset issuers utilizing blockchain technology have been the target of hackers. Has the issuer under consideration demonstrated a rigorous and well-tested tested cybersecurity program?

Firms that understand this market and develop procedures ahead of the curve will place themselves in a position to readily discuss specific market issues and evaluate specific products with their clients.

Oyster’s industry experts are seasoned professionals that have hands-on experience developing effective financial, operational and compliance governance and controls. We work with our clients, including those in the digital asset industry, to ensure that the developed frameworks meet their unique business and structure.

Our team of registration experts you will review your business structure, plan and documentation to determine the best approach. We understand how to design practical and reasonable regulatory compliance programs. Take advantage of our experience and let our industry NMA experts turn one of your firm’s toughest challenges into a smooth process.

About The Author
Photo of Bill Reilly

Bill Reilly

Bill Reilly is a respected financial services professional with over 35 years of consulting and regulatory experience. Bill leverages his industry expertise and relationships with state and federal regulators and self-regulatory organizations to guide broker-dealers, investment advisers and law firms providing legal representation through both proactive and reactive regulatory processes and compliance issues.