Crypto for Advisors: Crypto and Compliance

In “Ask an Expert,” Leo Mindyuk from ML Tech elucidates the significance of the U.S. Financial Innovation and Technology (FIT) Act. Essentially, this act refers to a piece of legislation designed to promote the adoption and development of technological innovations in the financial sector within the United States. The FIT Act aims to ensure that regulatory frameworks are updated and flexible enough to accommodate emerging technologies while maintaining proper oversight and risk management. By doing so, it facilitates innovation, enhances consumer protection, and keeps the U.S. competitive in the global financial landscape.

– Sarah Morton

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Navigating Crypto Compliance: A Matter of Trust

Crypto investors need to strike a delicate balance between seizing new opportunities and minimizing risks in a market known for its volatility. For investment advisors, the challenge is more complex: They must protect their standing with wary regulators and apprehensive clients who may be swayed by unfavorable media coverage.

The 2024 Edelman Trust Barometer highlights the significance of maintaining a trusted reputation in the face of shifting public expectations. Financial advisors need to navigate the impact of high-profile crypto collapses like FTX and Celsius, ongoing regulatory actions against companies such as SEC litigations, and emerging trends such as Ethereum ETFs, tokenization of real-world assets, and stablecoins.

Figure 1: Slide 29 of the 2024 Edelman Annual Trust Barometer

Here are five strategies that advisors can employ to safeguard their brand while acting as fiduciaries on behalf of their clients:

Five Strategies for Protecting Your Trusted Advisor Brand

Crypto investment advisors need to ensure that the digital asset choices align with both their own risk appetites and those of their clients. With an extensive range of options, from meme coins to bitcoin ETFs, it may be beneficial for advisors to forgo fees on crypto investments that clients are particularly drawn to but may not fully grasp. Additionally, adopting a comprehensive approach to risk management is crucial. This goes beyond the documented risk tolerance questionnaires and includes a more nuanced understanding of the potential risks involved in the digital asset market. As fiduciaries, advisors should prioritize their clients’ best interests and employ strategies that balance exploration with caution.

2. Test SEC Marketing Rule Compliance

It is crucial for financial advisors to give priority to complying with the Securities and Exchange Commission (SEC) marketing rules in today’s context, considering recent risk alerts and instances of AI-washing. Advisors should refrain from making unfounded claims about their crypto expertise and instead ensure they possess the necessary skills and experience. Furthermore, advisors must resist being influenced by social media trends when devising their marketing strategies. The regulatory landscape concerning cryptocurrencies in the United States is still under development. To navigate this complex environment effectively, advisors should regard crypto as financial instruments, similar to the European Union’s Markets in Crypto-Assets (MiCA) standards. It is essential to adhere strictly to SEC and FINRA guidelines when marketing these assets.

3. Document a Balanced Investment Process

Prior to gaining regulatory clarity, financial advisors are advised to record the discussion and decision-making process regarding risk factors such as uncertainty, market instability, and investment fundamentals during investment committee meetings. By referencing past experiences with illiquid assets during the 2008 financial crisis, advisors can uphold their fiduciary responsibilities despite uncertainties. During that period, it was uncertain how to fulfill fiduciary duties related to asset valuation; however, many successfully met these requirements through:

Advisors can adopt similar strategies for crypto asset investments.

4. Implement Best Practices for Service Provider Oversight

As a diligent analyst, I would recommend that when working with external crypto advisors or service providers, I make it a priority to adhere to guidelines suggested in the Securities and Exchange Commission’s (SEC) proposed rule on Outsourcing. By doing so, I can effectively safeguard my reputation. This involves gaining a thorough understanding of these standards and meticulously documenting how they are being implemented within my organization.

5. Monitor for Trust-Impaired Assets

Moving forward, the next few years will hold significant importance for ensuring compliance and managing risks in the cryptocurrency sector. The European Union is currently leading the charge with its MiCA (Markets in Crypto-Assets) regulation. In contrast, the United States is anticipated to follow suit, signaled by the bipartisan approval of FIT21 (Financial Institution Technology Act 21), shifting political landscapes, and the recent overturning of the Chevron doctrine. To navigate regulatory uncertainties effectively, advisors must be prepared for operational resilience.

Cryptocurrencies are transforming investment approaches for financial advisors in response to growing client expectations. Adopting these new tactics enables both firms and their clients to capitalize on crypto prospects while preserving their reputations.

– Beth Haddock, managing partner and founder Warburton Advisers

Ask an Expert

Q. What is the U.S. FIT Act?

A. The U.S. Financial Innovation and Technology (FIT) Act aims to create a definitive regulatory structure for digital assets in the United States. Its primary objective is to define the jurisdictions of various financial regulators, including the Securities and Exchange Commission (S.E.C.) and Commodity Futures Trading Commission (CFTC), regarding digital assets.

Q. Why does the U.S. FIT Act matter?

A: The lack of a defined regulatory structure for digital assets creates confusion among market players and a rift between regulators and participants. This persistent uncertainty and absence of definitive rules has had detrimental effects on the digital asset market. The proposed legislation intends to tackle issues in various essential areas, including regulatory certainty, consumer protections, taxation, and innovation.

Q. Why is the Outcome of the U.S. Election important?

Expert: The results of the upcoming elections will significantly influence the regulatory framework and trajectory of the U.S. digital asset sector. For example, the makeup of Congress could impact which legislative initiatives, like the FIT Act, gain traction. Moreover, a clear regulatory environment and political stability can boost investor confidence and encourage more investment in digital assets, contributing to market expansion.

– Leo Mindyuk, CEO, MLTech

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Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.