Key questions for financial advisors on cryptocurrency compliance

The bankruptcy of cryptocurrency exchange FTX and a heated debate on the regulation of digital currencies provide financial advisors with ample compliance-related reasons for caution.

In one panel a Financial Planning INVEST: Cryptocurrency Conference for Advisorsthree experts explained how planners can fit these valid concerns into trust advice that protects themselves and clients from the very real risk of loss and legal cases, all while helping interested customers to know and potentially invest in a compelling asset class.

Cryptocurrency “doesn’t fit exactly or very well with securities laws, currency and commodity laws, or really anything that we currently have in terms of regulation,” Jon-Jorge Aras, chairman of securities litigation at the Warren Law Group, he told the conference on Monday. This is the current state of affairs, even though digital assets touch all three areas and the Securities and Exchange Commission and FINRA said they “look at cryptocurrencies as a security,” Aras said.

“Investment advisers will have a fiduciary duty to their clients and can be in a very difficult position if there are huge bleeding losses in a portfolio,” he said. “There is a lot of justified skepticism. That said, an investment advisor and a financial advisor can advise their clients on crypto assets. It just has to be done in the same way any other type of disclosure would be done regarding something like this. simple as a common fund”.

Advisors face a dilemma about the complexity of asset class attractiveness and uncertainty about regulation by government, agreed Dan Kolber, CEO of Intellitest Securities. His firm raises capital for companies involved in cryptocurrencies and blockchains, and Kolber is also a legal counsel at Warren Law. Kolber gave the example of President Joe Biden executive order on cryptocurrency in March and guide by the Department of Labor on the use of asset class in 401(k) accounts.

The Labor Department came “as close as we can get to banning without banning” recommending a crypto investment in a 401(k) plan, because it pledged to “investigate any plan that holds cryptocurrencies,” Kolber said. At the same time, Kolber said he has watched with interest how agencies have responded to Biden’s request earlier this year for policy recommendations on cryptocurrencies.

“None of them were willing to draw a line in the sand, almost to a relationship, to a person,” Kolber said. “They’re FOMO – scared of missing out – like everyone else. They don’t want to be thought of as a fool. So as a result, they’re leaving the door open and are so cautious that it’s my prediction that it will be at least a year or two before all of this settles down.” solve”.

Meanwhile, advisors struggling with trusting that exchanges like FTX, Coinbase, Binance, or others have the reserves needed to stay in business long-term can take one simple step, according to Aras. Assets on the stock exchange are “really in the hands of a third party,” she noted, pointing out that investors would then become bankruptcy creditors if a company went bankrupt, assuming there’s anything left to claim. The The FTX saga offers a cautionary tale and solid motivation for consultants to educate themselves on storage and custody of cryptoassetsAras said.

“We’ve done cases like this at the firm, where we represent individuals who are just creditors in a bankruptcy. It’s not a nice place to be,” Aras said. “Tackling this with cold storage – meaning you put it on your USB device or store it yourself – that resource is yours. It’s archived, and you could put it online pretty much anytime. And I think, no doubt, given the current environment that we are in, this is the safest, in quotes, way of approaching management, custody and cryptocurrencies.”

Unfamiliarity with certain terms and concepts shouldn’t scare consultants away from the topic at large, Kolber said, noting that there is a risk of overcomplicating the topic. He recommended the The CFP Board’s new guide to cryptocurrency recommendations as a resource.

“You won’t have to read the code or understand the code, but you will have to understand the risk of investing in something,” he said. “These problems are going to be solved sooner or later. They have to be. They will be. That’s the good news. And, in the meantime, you look at cases, you go to conferences like this and you just use common sense.”

The simple need to learn and make clients aware of risk stood out as a key panel lesson to panel moderator Adam Blumberg, the founder of digital and alternative asset education company Interaxis.

“One of the important aspects to me is that you both, repeatedly, said, ‘Err on the side of being conservative, err on the side of more disclosure,’ which sounds overtly conservative,” Blumberg said. “And yet you’re both saying, ‘cryptocurrency is here to stay’, and you’re kind of a pro. You’re not saying it’s going away, which I think is an interesting dichotomy.”

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