OPINION: Whither Crypto Brokers?


Delays continue for FINRA approval of crypto trading platforms.

Throughout 2018, almost all business briefings with crypto trading-platform providers ended with the vendors acknowledging that the startup looked to partner with a broker-dealer or planned to file for broker-dealer status with the Financial Industry Regulatory Authority. However, that bullet point disappeared from the presentation deck in 2019.

One industry source estimated that more than 400 crypto-asset broker-dealer filings await FINRA’s approval. That equates to approximately 11 percent of existing FINRA-registered broker-dealers according to FINRA and Investment Advisor’s 2019 Broker-Dealer Reference Guide.

Only two things are keeping the approval sluice gates closed, and they are two crucial things: the determination of what is a digital security and the ability to custody them properly.

On April 3, SEC’s FinHub released its Framework for “Investment Contract” Analysis of Digital Assets, which added roughly 70 more granular questions to the four-question Howey Test.

Three months later, the SEC’s Division of Trading & Markets and FINRA issued their Joint Staff Statement on Broker-Dealer Custody of Digital Asset Securities, which enumerated the regulators’ concerns regarding custody while passing part of the regulatory hot potato to the Securities Investor Protection Corp.

Each release is a step in the positive direction, but small steps in a positive direction. The Analysis and Framework are staff opinions that come with boilerplate disclaimers that they are on rules, regulations, guidance, or statements from the respective regulators.

When the SEC and FINRA eventually approve the necessary regulations, guidance, and statements, expect a rapid bloom of broker-dealers specializing in digital assets before they disappear as rapidly as they came when the entrenched broker-dealers build or buy their digital asset trading desks.