William Brannan

Ethan Silver

The Financial Industry Regulatory Authority (FINRA) is continuing its bizarre transformation into a crypto asset regulator with the recent publication of its Crypto Assets Communications Sweep (Sweep) results.&nbsp;



FINRA lacks regulatory authority over non-securities crypto assets. Despite this fact, FINRA continues to display an unwavering, albeit misguided interest in the non-securities crypto asset activities of its members, affiliates, vendors and personnel.&nbsp;



FINRA initiated the Sweep more than 14 months ago: It consumed significant time, resources and attention for those subjected to the Sweep. But even with the significant allocation of valuable member resources, the Sweep findings are lackluster at best, and at worst highlight FINRA’s continued struggle to make sense of a complex industry outside of its regulatory gambit.&nbsp;



While the Sweep reflects further intrusion into the non-securities crypto asset regulatory space by an unqualified regulator, the broader implications for current FINRA members and those hoping to achieve membership are strikingly discouraging.&nbsp;



<h2 class="wp-block-heading">Where does the Sweep come from?</h2>



FINRA debuted its foray into the non-securities crypto asset regulatory space in 2018 with the publication of Regulatory Notice 18-20 (RN 18-20).&nbsp;



This notice “encouraged” FINRA members to notify FINRA if the member, any of its affiliates or associated persons engaged or intended to engage in any activity related to crypto assets.&nbsp;



FINRA’s curiosity extended beyond crypto asset securities, and requested details regarding any and all manner of crypto asset activities. FINRA effectively re-issued this reporting request in Regulatory Notice 20-23 in 2020 and Regulatory Notice 21-25 in 2021, the latter of which remains in place to this day.



Not content with its far-reaching and blunt reporting “request,” FINRA then initiated a targeted exam of FINRA member retail communications concerning crypto asset products and services in November 2022.



<h2 class="wp-block-heading">Sweep findings</h2>



FINRA reviewed more than 500 crypto asset-retail communications, dedicated valuable FINRA resources and no doubt consumed countless FINRA member manhours in conducting the Sweep.&nbsp;



The result?&nbsp;



Opaque references to having identified “potential” violations of FINRA advertising rules.&nbsp;



The reality?&nbsp;



If our experience representing FINRA members subject to the Sweep is any indication, the Sweep appears to have effectively served as an out-sourced, self-serving educational program of sorts, paid for and imposed on FINRA members by regulatory fiat.



Read more from our opinion section: <a href="https://blockworks.co/news/washington-crypto-panic-congress">Washington shouldn’t give in to crypto panic</a>



The Sweep found, among other things, FINRA member communications that included “unclear and misleading explanations of how crypto assets work and their core features and risks” as well as “comparisons of crypto assets to other assets […] without providing a basis to compare the varying features and risks of these investments.”&nbsp;&nbsp;



Unfortunately, these “findings” raise more questions than answers.&nbsp;



For instance, by what standard does FINRA possibly determine whether the core features and risks of a non-securities crypto asset product is appropriately explained? Most non-securities crypto asset products are regulated by the states and/or the Commodity Futures Trading Commission and facilitated by appropriately (and separately) regulated FINRA member affiliates. To what extent are FINRA members expected to conform their affiliate marketing to satisfy the uninformed views of a securities regulator as to the operation of a non-securities, separately regulated financial product?&nbsp;



Put bluntly, does FINRA have the capacity to know whether a non-securities crypto asset is in fact accurately explained, or the risks accurately presented?



The issue of cross-affiliate marketing is far from novel. In fact, many of the nation’s largest broker-dealers market securities products side-by-side with traditional and sophisticated non-securities financial products offered by their affiliates.&nbsp;



Does FINRA hold itself out as the arbiter for determining whether precious metal futures or indexed universal life insurance products are “unclear and misleading” over the judgment (and regulatory oversight) of the company’s expert in such products? We suspect not.



<h2 class="wp-block-heading">Implications for the securities industry</h2>



FINRA’s seeming compulsion to insert itself in matters further and further afield from its regulatory mandate presents real-world consequences for both operating broker-dealers as well as those companies looking to establish securities firms.&nbsp;



For operating broker-dealers, they are increasingly required to dedicate time and resources to navigate intrusive and often non-sensical FINRA crypto asset regulatory inquiries. These inquiries are often focused on products or services that are not even offered by the FINRA member itself.&nbsp;



This state of affairs places unnecessary burdens on internal compliance teams, hinders product development and obfuscates the separate and well-established regulatory regimes within which many broker-dealers and their affiliates operate.



For crypto asset companies intending to establish separate, FINRA member broker-dealers, FINRA’s preoccupation with non-securities crypto assets has expanded in scope. What was once simply a nuisance is now a fundamental misalignment of regulatory functions and priorities that often effectively serves to prohibit new member applicants with crypto asset affiliates from obtaining membership.&nbsp;



As an example, we have seen firsthand FINRA’s Membership Application Program Group (MAP) import the Sweep examination criteria directly into the new membership process. This action fundamentally and improperly re-characterizes the MAP function from one of membership evaluation to exam enforcement. MAP is not equipped to serve this function, nor should it be. Unfortunately, innovative, tech-focused investment platforms continue to bear the brunt of FINRA’s continued imprudence in this respect.&nbsp;



Until FINRA abandons its misguided attempt to seek indirect oversight over non-securities crypto assets and the activities of separately regulated financial institutions, market integrity and the investing public will undoubtedly continue to suffer.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Ethan L. Silver is Chair of the FinTech and Broker-Dealer Practices and Co-Chair of the crypto practice at law firm Lowenstein Sandler. Ethan is a recognized leader in the representation of broker-dealers in regulatory, enforcement, and compliance matters related to federal and state securities laws and regulations; and the rules of self-regulatory organizations such as Financial Industry Regulatory Authority (FINRA). He also spearheads the firm’s crypto and FinTech practices, representing wide-ranging crypto-focused businesses and regulated financial technology companies including mobile-first brokerage platforms and digital-advisers.



William Brannan is a partner and Vice Chair of Lowenstein Sandler’s crypto practice. He provides counsel regulated financial technology companies navigating complex securities, derivatives, and cryptocurrency regulatory issues. Will regularly advises digital asset exchanges, multi-asset trading platforms, robo-advisers, market makers, liquidity providers, custodians and digital asset services providers with respect to federal and state cryptocurrency regulations, securities laws, FINRA rules, security-based swap rules, state money transmitter licensing requirements and the New York BitLicense.



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FINRA

FINRA’s intrusive crypto sweeps are misguided

Ben Strack

A Financial Industry Regulatory Authority (FINRA) review of firms’ crypto communications found that roughly 70% potentially violate a specific investor protection guideline.



The analysis, launched in November 2022, focused on how firms are complying with FINRA Rule 2210 — a regulation that “prohibits claims that are false, exaggerated, promissory, unwarranted or misleading.”&nbsp;



The rule also forbids the omission of facts that could mislead investors.&nbsp;



“Potential substantive violations” of the regulation existed in about 70% of the 500 analyzed crypto-related communications to retail investors from FINRA member firms, the regulator <a href="https://www.finra.org/rules-guidance/guidance/targeted-examination-letters/sweep-update-jan2024">said</a> Tuesday.&nbsp;



Such violations included companies’ failure to differentiate between crypto assets offered through the firm and those provided through an affiliate or third party, the FINRA <a href="https://www.finra.org/rules-guidance/guidance/targeted-examination-letters/crypto-asset-communications">analysis</a> found. Such communications also comprised false statements or implications that crypto assets functioned like cash.&nbsp;



Read more: <a href="https://blockworks.co/news/crypto-communication-crisis">Crypto can’t afford another communication crisis</a>



“This update does not create new legal or regulatory requirements or new interpretations of existing requirements, nor does it relieve firms of any existing obligations under federal securities laws and regulations,” FINRA <a href="https://www.finra.org/rules-guidance/guidance/targeted-examination-letters/sweep-update-jan2024">wrote</a> on its website. “Rather, this update poses questions for firms to consider as they review and supervise their retail communications concerning crypto assets.”



<a href="https://blockworks.co/tag/finra">FINRA</a>’s Membership Application Program (MAP) follows the US Securities and Exchange Commission’s guidance in assessing a firm’s proposed crypto asset securities business line under applicable rules.



FINRA has sent out crypto-related warnings and considerations before.&nbsp;



The regulator — with the <a href="https://blockworks.co/tag/sec">SEC</a> and the North American Securities Administrators Association — previously pointed out risks associated with self-directed Individual Retirement Accounts, which it notes may invest in crypto assets.&nbsp;



“Crypto assets may be securities that are offered without SEC registration or a valid exemption from registration, and may not be accompanied by complete or accurate information to aid investors in making informed decisions,” the regulators said at the time.&nbsp;&nbsp;



Read more: <a href="https://blockworks.co/news/regulators-warn-of-retirement-crypto-risk">SEC, FINRA double down on warning of retirement account crypto risk</a>



FINRA more recently included crypto asset developments in its 2024 regulatory insight <a href="https://www.finra.org/rules-guidance/guidance/reports/2024-finra-annual-regulatory-oversight-report/crypto">report</a>. The regulator’s membership application program follows the SEC’s guidance in assessing a firm’s proposed crypto asset securities.&nbsp;&nbsp;



Crackdowns around the way crypto firms communicate to investors goes beyond the US, with the United Kingdom’s Financial Conduct Authority (FCA) recently beefing up efforts to make sure <a href="https://blockworks.co/news/fca-uk-unregistered-crypto-firms-huobi-kucoin">crypto firms marketing to UK customers are complying</a> with certain <a href="https://www.fca.org.uk/publication/policy/ps23-6.pdf">regulations</a>.



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70% of crypto communications potentially misleading, FINRA analysis finds

Katherine Ross

Patrick McHenry R-N.C., Chair of the House Financial Services Committee, along with other members of Congress, sent letters to Robert Cook, CEO of the Financial Industry Regulatory Authority (FINRA) and US Security and Exchange Commission chair Gary Gensler on Tuesday.



McHenry asked Cook and Gensler to break down how Prometheum was approved as a special purpose broker-dealer. They also questioned the ties that Prometheum reportedly has to the Chinese Communist Party.



Legislators also <a href="https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=408950">asked</a> about the timing of the approval, saying that it “raises concerns that it was aimed at demonstrating that legislation is not needed because there is a workable regulatory framework for the custody of digital asset securities.”



Prometheum was granted approval on May 17 of this year, and legislation was released on June 2.&nbsp;&nbsp;



In the letter to Cook, they asked <a href="https://blockworks.co/tag/finra">FINRA</a> to supply a briefing to the House Financial Services Committee by Aug. 22, though they’d appreciate a response as soon as possible.



In the <a href="https://financialservices.house.gov/uploadedfiles/2023-08-09__fsc_gop_letter_to_finra_re_prometheum.pdf">letter</a>, the Committee asked for the number of special purpose broker-dealer applications, how many applications have been denied, and what risks were assessed prior to approving Prometheum.&nbsp;



Additionally, politicians asked for documentation related to the application, and communications both within FINRA and with the <a href="https://blockworks.co/tag/sec">SEC</a> on the applications.



While the letter to the SEC did not include the same questions as McHenry posed to FINRA, it did request documents and communications related to the application.



“In fact, you have touted the Prometheum approval multiple times in public statements to support your position that digital asset firms can comply with the existing regulatory framework,” Committee members <a href="https://financialservices.house.gov/uploadedfiles/2023-08-09_fsc_gop_letter_to_sec_re_prometheum.pdf">wrote</a> to <a href="https://blockworks.co/tag/gary-gensler">Gensler</a>.&nbsp;



During his testimony to the Committee earlier this year, Aaron Kaplan, CEO of Prometheum, stated that 20% of his company is owned by Shanghai Wanxiang Blockchain Inc and that “according to SEC filings, a representative of that entity, Feng Ziao, serves as a director in Prometheum.”



Prometheum and Wanxiang entered into a 2018 agreement to develop blockchain trading software, but the agreement was later terminated. 



“Prometheum’s former relationships with Wanxiang and its affiliates have been reviewed by the SEC, which closed its investigation, and CFIUS, which never opened up a formal investigation,” Prometheum said in an emailed statement to Blockworks.



“Prometheum purpose-built its technology with the goal to develop a market infrastructure for digital asset securities that is compliant with the federal securities laws. This technology will serve as a building block for a compliant and orderly digital asset securities marketplace that protects investors and serves their best interests.”



McHenry isn’t the only one concerned with the Prometheum approval. In July, Representative Ritchie Torres D-N.Y. <a href="https://blockworks.co/news/ritchie-torres-prometheum-letter">asked the SEC</a> to open an investigation into how the company — which “has not yet served a single customer” according to McHenry’s letters — was granted a license.



The <a href="https://blockworks.co/tag/blockchain-association">Blockchain Association</a> has also <a href="https://blockworks.co/news/prometheum-sec-broker-dealer-investigation">expressed its concern</a> over the alleged “sweetheart” deal between Prometheum and the SEC.



Updated Tuesday, August 15 at 5:20 pm ET: Added statement from Prometheum



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McHenry questions timing of Prometheum’s special purpose broker-dealer approval

Shalini Nagarajan

<div id="highlights-block_62a9caaa6dbdc" class="highlights">
 <ul>
 <li>FINRA plans to boost resources to better understand and observe cryptocurrencies</li>
 <li>The move aligns with the SEC&#8217;s plans to hire more staff for crypto enforcements</li>
 </ul>
 
</div>



The Financial Industry Regulatory Authority (FINRA) is gearing up for more involvement in cryptocurrency after several organization members have shown interest in trading digital assets.



While federal agencies consider market protection measures, FINRA expects to play a role in policing digital asset markets, <a href="https://www.reuters.com/markets/us/wall-st-watchdog-finra-bulk-up-crypto-capabilities-ceo-says-2022-06-14" target="_blank" rel="noreferrer noopener">Reuters</a> reported CEO Robert Cook saying at an industry conference on Tuesday.&nbsp;



Cook said FINRA — which regulates registered brokers and broker-dealers in the US — will need to engage with the industry and requires resources to do so. 



FINRA has approved dozens of its members to trade in cryptocurrencies, Cook said. Boosting resources and staff aside, the non-governmental watchdog is exploring whether it can perform cross-market surveillance across blockchains, he added.



Cook even encouraged employees recently laid off by crypto companies to call him. Tumbling crypto prices have triggered layoffs at major crypto exchanges, including <a href="https://cms.blockworks.co/coinbase-cut-workforce-ceo-wary-of-potential-recession/" target="_blank" rel="noreferrer noopener">Coinbase</a>, <a href="https://cms.blockworks.co/gemini-joins-growing-list-of-crypto-exchanges-cutting-staff-amid-downturn/" target="_blank" rel="noreferrer noopener">Gemini</a>, <a href="https://cms.blockworks.co/crypto-com-cutting-5-of-workforce-amid-digital-asset-downturn/" target="_blank" rel="noreferrer noopener">Crypto.com</a>, BitMEX, Buenbit and Bitso. 



Echoing Cook, SEC Chair Gary Gensler called for urgent action to protect crypto investors and other market participants in a video interview on Tuesday, <a href="https://twitter.com/WSJ/status/1536760747526705157" target="_blank" rel="noreferrer noopener">citing</a> this week’s account lockouts at Celsius.



Last month, the SEC (which oversees FINRA) <a href="https://www.sec.gov/news/press-release/2022-78" target="_blank" rel="noreferrer noopener">pledged</a> to boost the headcount of its Crypto Assets and Cyber Unit enforcement division from 30 to 50 dedicated positions.



In any case, FINRA’s Cook isn&#8217;t alone in seeking fired blockchain industry employees during one of the space&#8217;s most turbulent periods in years. Crypto entrepreneur Justin Sun said in a Tuesday <a href="https://twitter.com/justinsuntron/status/1536691175423365126" target="_blank" rel="noreferrer noopener">tweet</a> that his firms TRON, Poloniex, BitTorrent, USDD, APENFT, JUST Foundation and SunIO are actively hiring.



Binance also <a href="https://twitter.com/cz_binance/status/1537013824666095617" target="_blank" rel="noreferrer noopener">said</a> it has 2,000 open position while Kraken flagged its global hiring push in a <a href="https://blog.kraken.com/post/14372/kraken-announces-global-hiring-push-and-commitment-to-crypto-first-culture/" target="_blank" rel="noreferrer noopener">blog</a>, confirming plans to fill more than 500 positions this year.



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cryptocurrency

Wall Street Regulator FINRA Wants To Hire Fired Crypto Employees

Jacquelyn Melinek

<div id="highlights-block_61f2cbee2adcc" class="highlights">
 <ul>
 <li>The deal is expected to close in the third quarter of 2022</li>
 <li>Apifiny has partnered with over 20 of the top 100 crypto exchanges by trading volume including Huobi Global, OKEx, Kucoin, OKCoin and Blockchain.com</li>
 </ul>
 
</div>



Digital asset trading platform Apifiny Group is the latest crypto company to go public via a special purpose acquisition company.



Apifiny has entered a $530 million agreement with Abri SPAC I&nbsp; to become a publicly traded company on the Nasdaq.&nbsp;



The deal is expected to close in the third quarter, subject to shareholder and regulatory approval. The combined company is valued at $530 million, including a contribution of up to $57 million of cash held in Abri’s trust account



“We aim to build a truly global digital asset trading network,” Haohan Xu, CEO of Apifiny, told Blockworks. “Going public is just the beginning of the journey.”&nbsp;



Apifiny sees going public as a means to accelerate growth, become fully regulated and acquire customers more quickly Erez Simha, the company’s president and CFO, told Blockworks.



“When you look at the profile of the team at Abri, they’re highly operational and have many years of private equity experience which I’m sure will contribute to us later on,” Simha said. “At the end of the day, we want to have fun with what we’re doing and want to focus on the business, and I think this has met the criteria we put to ourselves before choosing a partner.”



Founded in 2018, Apifiny, has partnered with over 20 of the top 100 crypto exchanges by trading volume including Huobi Global, OKEx, Kucoin, OKCoin and Blockchain.com.



Last year, Apifiny was <a href="https://cms.blockworks.co/apifiny-reveals-pre-ipo-plans/" target="_blank" rel="noreferrer noopener">granted</a> a US FINRA broker-dealer license, joining other crypto trading companies like Coinbase, Gemini and Circle. 



The company’s board of members include Tim Murphy, former deputy director of the Federal Bureau of Investigation; Laurence Charney, former partner of Ernst &amp; Young and; Samuel Shen, CEO of Vnet Group, among others. 



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crypto exchange

Crypto Exchange Apifiny to Go Public Via $530M SPAC

Sam Reynolds

<div id="highlights-block_61423045a19fb" class="highlights">
 <ul>
 <li>Licensed digital assets platform Oasis Pro Markets announced that it had partnered with Anchorage for Custody and Settlement</li>
 <li>Anchorage Digital has been reported to be nearing a deal with the FDIC to help it custody digital assets</li>
 </ul>
 
</div>



One of the few exchanges to have an Alternative Trading System (ATS) license announced today a partnership with digital asset bank Anchorage for on-chain custody and settlement.



“Anchorage has been a true partner in helping us realize our goal of streamlining the trading experience for institutional investors looking to access secondary market liquidity for digital securities,” said Pat LaVecchia, CEO of Oasis Pro Markets in a release. “Anchorage’s superior settlement and custody technologies stand out in the market, as they provide the controls for selecting digital assets, reaffirming our commitment to remain agile to technological and regulatory developments to grow the ecosystem and create a dynamic marketplace.”



Oasis Pro Markets says its trading platform will offer equity, fixed income, and asset-backed securities when it launches. The company says it will first launch on the Ethereum blockchain and will support other blockchain protocols soon after.



Digital asset bank Anchorage has been <a href="https://decrypt.co/80403/fdic-deal-crypto-custodian-anchorage-manage-assets-failed-banks" target="_blank" rel="noreferrer noopener">reported to be close</a> to signing a deal with the FDIC to be a cryptocurrency custodian for the institution. As more and more banks begin to adopt digital assets, the FDIC needs infrastructure in place to custody and store these assets should it need to step in during a bank failure. This also shows how established Anchorage, with its charter, has become within the broader financial industry.&nbsp;



When it launches, Oasis Pro Markets will be an institutional and accredited focused exchange. ATS platforms are licensed by the SEC in dealing with securities and are members of FINRA, a self-regulatory organization for the broker-dealer industry.&nbsp;



Coinbase is not registered with the SEC as an ATS platform and the problems with this arrangement are beginning to show. Recently, SEC chair Gary Gensler <a href="https://cms.blockworks.co/gensler-investors-are-not-protected-when-it-comes-to-crypto/">took aim at Coinbase</a> during testimony before the Senate Banking Committee saying it lists “dozens of tokens that might be securities.”



<hr class="wp-block-separator"/>



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<hr class="wp-block-separator"/>

Anchorate

Oasis Pro Markets Taps Anchorage for ATS Custody and Settlement

Brian Nibley

<div id="highlights-block_613e9df20a202" class="highlights">
 <ul>
 <li>Exodus&#8217; groundbreaking Reg A+ offering, and upcoming listing on tZERO, &#8220;gives the broader investment community unique front row access to a Company that&#8217;s directly participating in the unprecedented growth of the digital currency movement</li>
 <li>In Q2, we achieved our greatest number of monthly active users, our most fiat onboarded, and our highest quarterly revenue to date,&#8221; said James Gernetzke, CFO of Exodus. Q2 revenue came in at $27.7 million, a 651% year-over-year increase</li>
 </ul>
 
</div>



Trading of the Exodus Movement, Inc. (Exodus) Class A common stock will begin on September 14, 2021. Shares will be traded on the tZERO alternative trading system (ATS), a wholly-owned broker-dealer subsidiary of tZERO regulated by FINRA and the SEC.



Let’s take a look at this development, what it means for the companies involved, and how investors might take advantage of this opportunity.



<h3 class="wp-block-heading">What does this mean for Exodus?</h3>



Exodus is the leading non-custodial crypto wallet platform. By listing shares of stock on the tZERO platform, Exodus is “taking the next step in the democratization of finance,” according to Sebastián Milla Goñi, chief of special projects at Exodus.



Solomon Tesfaye, head of business development and capital markets at tZERO, echoed this sentiment by noting that if the company had chosen to offer shares of equity using other, more traditional means, “the broader investment community would not have access to an investment like Exodus. A lot of wealth creation now happens in the private markets and either the equity checks are too large for a retail investor to be able to participate, or most accredited investors are not even invited to the table to invest.”



Everyone can access the general cryptocurrency markets; soon everyone may also own shares of a publicly traded company on the forefront of the crypto industry, too, noted Milla Goñi.



<h3 class="wp-block-heading">Why tZERO?</h3>



There are several alternative trading systems on the market today. Why has Exodus chosen to list their shares on tZERO?



Tesfaye put it this way: “tZERO has the longest track record in the space, and we have over 75% of the actual digital security asset market on our platform, and our volume reflects over 95% of global volume within the space. Given Exodus’s scale, they thought we were the most appropriate venue to be hosting their equity from a trading perspective.”



This should give potential investors confidence that they can trade shares of Exodus on a trusted, well-established alternative trading system, he added.



<h3 class="wp-block-heading">Why should investors take note?</h3>



Exodus gives investors a first-of-its-kind opportunity to access the growth of bitcoin and cryptocurrency markets from the comfort of a traditional security. &#8220;In Q2, we achieved our greatest number of monthly active users, our most fiat onboarded and our highest quarterly revenue to date,&#8221; said James Gernetzke, chief financial officer of Exodus. 



Exodus recently released its <a href="https://www.exodus.com/investors/documents/20-08-21_Exodus_Announces_Second_Quarter_2021_Results.pdf">Second Quarter 2021 earnings results.</a>&nbsp;Revenue came in at $27.7 million, a 651% year-over-year increase.&nbsp;The company has nearly doubled its staff over the past year, and in an industry not known for strong customer service, Exodus’s median response time to its customer inquiries dropped to eight minutes flat.&nbsp;



Solomon added that it’s “extremely easy” for new investors to get started on the tZERO ATS platform, fund their account and purchase shares.



He said that the experience is “exactly like creating a Schwab or eTrade account,” so there’s no steep learning curve for those who want to trade on the platform.



Investors interested in trading shares of Exodus can set up a tZERO account from within the Exodus app. The following guide contains instructions on how to register an account to get started: <a href="https://support.exodus.com/article/1626-how-to-buy-exodus-shares?utm_source=Blockworks&amp;utm_medium=tZERO_launch&amp;utm_campaign=growth_2021">Click here and discover how to buy Exodus shares.</a>

DeFi

Exodus Takes the ‘Next Step’ in Democratizing Finance

Casey Wagner

<div id="highlights-block_60de1b079f520" class="highlights">
 <ul>
 <li>The IPO filing comes as Robinhood finds itself in hot water on the regulatory front. </li>
 <li>On Wednesday, the Financial Industry Regulatory Authority ordered Robinhood to pay roughly $70 million for misleading customers and systemwide outages.</li>
 </ul>
 
</div>



In one of the most highly anticipated initial public offering announcements of the year, Robinhood Markets, known as the gateway for young investors, filed with the Securities and Exchange Commission Thursday.&nbsp;



The <a href="http://sec.gov/Archives/edgar/data/1783879/000162828021013318/robinhoods-1.htm" target="_blank" rel="noreferrer noopener">S-1 form</a> revealed the financial services company has 18 million retail clients, a 151% increase from 2020, and $80 billion in client assets. In 2020, Robinhood reported a net income of $7.45 million on a net revenue of $959 million. In 2019, the company reported a loss of $107 million on $278 million. 



The brokerage plans $100 million in revenue from the public offering and plans to allocate between 20% and 35% of shares to the platform’s retail customers.&nbsp;



The IPO filing comes as Robinhood finds itself in hot water on the regulatory front.&nbsp;



On Wednesday, the Financial Industry Regulatory Authority ordered Robinhood to pay roughly $70 million for misleading customers and systemwide outages. It is the largest ever penalty made by FINRA.&nbsp;



The settlement cited the service outages that occurred in March 2020 and Robinhood’s inadequate screening process for approving options traders, which is a riskier practice.&nbsp;



FINRA fined the company $57 million and ordered Robinhood to pay about $13 million in restitution to thousands of clients that were impacted or misled.



Founded in 2013, Robinhood pioneered free trading with a user-friendly app. The California-based startup became so popular that the entire exchange industry was pushed to drop trading commissions in 2019.&nbsp;



Robinhood users can trade equities, cryptocurrencies and options and open cash management accounts. Most trades are free but the company profits from its premium paid subscription and its customer order flows.&nbsp;



The popularity has not come without consequence though.



Following January’s <a href="https://cms.blockworks.co/gamestop-frenzy-funneled-142m-from-citadel-to-robinhood/" target="_blank" rel="noreferrer noopener">GameStop frenzy</a>, which resulted in a $1.4 billion loss for the company in the first quarter, the brokerage limited the purchase of GameStop stock.



In addition, the GameStop and AMC stock run-ups have prompted calls for further regulations on trading platforms.



To date, the US House Committee on Financial Services has had <a href="https://cms.blockworks.co/sec-considering-new-trading-rules/" target="_blank" rel="noreferrer noopener">three hearings</a> on GameStop so far, its most recent in May. SEC Commissioner Gary Gensler appeared before lawmakers and revealed that the SEC will be considering new trading rules in response to GamesStop’s short squeeze and Archegos Capital Management’s collapse. 



Gensler said that he hopes to implement new policies, including increased disclosure requirements on short selling and greater transparency for securities lending, which supports short selling. The SEC will also be seeking public input into how trading apps, namely Robinhood, manipulate trading with “gamification” features, per Gensler’s request.&nbsp;



Robinhood and similar apps have been criticized for making user interfaces too video-game-like. Digital confetti used to appear when users made trades. Robinhood argues that appealing to younger investors democratizes the markets. The company has replaced the confetti image with other shapes.&nbsp;



As frustrated as some lawmakers may be, financial markets attorney Paul McCurdy points out that confetti is not explicitly illegal under the <a href="https://www.investor.gov/introduction-investing/investing-basics/role-sec/laws-govern-securities-industry" target="_blank" rel="noreferrer noopener">Securities Exchange Act of 1934</a>, which prohibits certain types of conduct in the markets. “I don’t think confetti is illegal, and I don’t think it is dangerous,” McCurdy said during a recent <a href="https://event.on24.com/eventRegistration/EventLobbyServlet?target=reg20.jsp&amp;referrer=https%3A%2F%2Fwww.legalexecutiveinstitute.com%2F&amp;eventid=3042312&amp;sessionid=1&amp;key=057EC03AE4CDDDA3825C7474CA366F95&amp;regTag=&amp;V2=false&amp;sourcepage=register" target="_blank" rel="noreferrer noopener">webinar</a> about Robinhood’s role in markets.

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