FINRA Crawls Toward Crypto Acceptance While Wirehouses Hold ...

In response to the undeniable impact of digital assets on the investment world, FINRA recently ... [+] published a comprehensive section on crypto assets on their website. (Photo Illustration by Omar Marques/SOPA Images/LightRocket via Getty Images)

As cryptocurrency continues its march into mainstream finance, the wealth management industry finds itself at a crossroads. The Financial Industry Regulatory Authority is taking tentative steps toward acknowledging the role of digital assets, while wirehouses remain steadfast in their conservative approach, potentially to the detriment of their advisors and clients.

In response to the undeniable impact of digital assets on the investment world, FINRA recently published a comprehensive section on crypto assets on their website. This move represents a slow but discernible shift in the regulatory landscape, as FINRA attempts to provide some guidance for institutions and individuals under their purview.

The organization’s approach, while measured, largely aims to highlight the potential risks associated with crypto investments. FINRA emphasizes that crypto assets are “often extremely volatile,” pointing out the potential for dramatic and unpredictable price swings. They also note that many crypto assets and related activities lack the robust regulatory protections investors are accustomed to with traditional securities.

While FINRA’s efforts to provide clarity represent progress, the pace of their adaptation to the maturing crypto landscape leaves much to be desired. Their cautious stance, while rooted in investor protection, may inadvertently be contributing to disgruntlement among professionals operating under their authority and subsequent mistrust from the very investors the organization aims to safeguard.

Despite FINRA’s gradual movement toward crypto acceptance, many wirehouses have chosen to maintain a rigid stance, effectively barring their advisors from discussing crypto assets with most clients. This inflexibility is increasingly putting them at odds with both their advisors and the evolving needs of their clientele.

The wirehouses’ failure to adapt to the changing regulatory environment regarding crypto is more than just a conservative approach—it’s a strategic misstep that’s placing their advisors in a precarious position. Tyrone Ross, CEO of 401 Financial and Turnqey Labs, highlighted this issue in a phone interview: “Wirehouse advisors are very much about their brand, looking astute, and being aware. When clients constantly ask about crypto and they have to deflect away from it, it lessens their credibility in their clients’ eyes.”

This situation has led to growing frustration among wirehouse advisors, many of whom feel they’re being left behind as the market evolves. Unable to address client inquiries about one of the most talked-about asset classes of our time, these advisors find themselves in the uncomfortable position of potentially providing incomplete advice to their clients.

The wirehouses’ inflexibility is not just a disservice to their advisors; it ultimately tarnishes the quality of advice they can provide to clients. In an era where comprehensive financial planning increasingly includes considerations of digital assets, the wirehouses’ stance leaves a significant gap in their service offering.

In stark contrast to the wirehouses, Registered Investment Advisors, primarily regulated by the Securities and Exchange Commission rather than FINRA, have found themselves in a more flexible position. While still subject to fiduciary duties and SEC oversight, RIAs generally have more leeway in discussing and potentially recommending crypto assets to their clients.

This regulatory difference has allowed many RIAs to be more proactive in educating themselves and their clients about the crypto market. They can engage in more open conversations about the potential benefits and risks of digital asset investments, helping clients make informed decisions in this emerging space.

The disparity in approach is reflected in the numbers. A 2024 poll from Digital Assets Council of Financial Professionals and Franklin Templeton, with RIAs representing the majority of respondents, found that more than a third of the advisors polled planned to recommend digital assets within the next six months. This proactive stance puts RIAs at a distinct advantage in serving clients interested in exploring the crypto space.

The complexity of the situation is further highlighted by recent political interventions. Four House Republicans penned a letter expressing their concerns about the regulatory landscape, as reported by The Daily Hodl. The letter states, “The SEC and FINRA are complicit in perpetuating confusion and uncertainty in the marketplace, which ultimately harms market participants and consumers.”

While this criticism may be overly harsh, it underscores the challenges regulators face in striking the right balance between investor protection and market innovation. The criticism comes at a time when the crypto market is seeing increased institutional interest. As reported by NYDIG, while hedge funds have become significant holders of Bitcoin ETFs, wirehouse and bank wealth management platforms remain largely absent from this space.

As the crypto market continues to mature and integrate with traditional finance, the tension between regulatory caution and market demand is likely to persist. FINRA’s crawl toward crypto acceptance, while slow, at least acknowledges the changing landscape. Wirehouses, on the other hand, risk becoming obsolete if they continue to hold the line against crypto discussions.

For now, investors should be aware of these differences in approach between wirehouses and RIAs. Those interested in exploring crypto investments may find RIAs more willing and able to engage in these conversations. However, it’s crucial to remember that regardless of the type of advisor, due diligence and a thorough understanding of the risks involved in crypto investments remain paramount.

The recent criticism from House Republicans, along with a purportedly crypto-friendly incoming presidential administration and Congress, may serve as a catalyst for more transparent and consistent regulatory guidance. This could potentially reshape the landscape for both wirehouses and RIAs in their approach to crypto assets.

As the industry awaits clearer direction, wirehouses find themselves at a crossroads. Their challenge moving forward will be to find ways to adapt their policies to the evolving crypto landscape while maintaining their commitment to investor protection. Failure to do so may result in a continued loss of credibility, potential business opportunities, and most importantly, the ability to provide comprehensive, relevant advice to the clients they are tasked to serve.