Crypto Assets - Buying and Selling

While some FINRA member broker-dealers sell crypto assets that are securities or offered as securities to investors through private placement offerings, the vast majority of crypto asset offerings aren’t conducted by these regulated entities. Similarly, while certain FINRA member broker-dealers facilitate trading in crypto assets that are securities or are offered and sold as securities through alternative trading systems (ATSs), nearly all buying and selling of crypto assets occurs outside of and without the protections provided by registered broker-dealers and other SEC-regulated institutions.

Notably, some broker-dealers have established relationships with an affiliate or third party to enable customers of the broker-dealer to buy, sell and custody some crypto assets through this affiliate or third party. In these relationships, it’s important to know that these affiliates and third parties aren’t required to comply with the comprehensive regulations applicable to registered broker-dealers, and their customers don’t receive the same protections as customers of registered broker-dealers.

Buying and selling crypto assets can be both similar to and different from buying and selling stocks and bonds.

For example, crypto asset service providers might:

  • Allow users to trade certain crypto assets. These crypto asset service providers serve as intermediaries that enable trading, record ownership and facilitate the custody of crypto assets. While crypto asset trading platforms are widely referred to as "exchanges," both by the media and the providers themselves, they aren't registered with the SEC and don’t meet the regulatory standards or provide the investor protections of broker-dealers or national securities exchanges. Some of these entities might be registered as money services businesses, which have certain anti-money laundering—not investor protection—obligations under the Bank Secrecy Act. Additionally, crypto asset service providers operating outside the U.S. might be subject to different rules and regulations than those within the U.S., and there may be limited oversight of those crypto asset service providers—or none at all.
  • Offer ICOs, IEOs and STOs. A calendar of ongoing and upcoming offerings might be provided by the crypto asset service provider or by third parties, similar to calendars for initial public offerings (IPOs) of stock. Read materials associated with an offering prior to investing, understanding that information included in these materials is sometimes misleading or fraudulent. Be aware that federal regulators have taken action against crypto asset service providers for making unregistered offerings of securities; failing to register as a broker-dealer, exchange and/or clearing agency; and fraud.
  • Offer interest or other monetary incentives to gain new customers and assets. In particular, offers to move assets from one crypto asset service provider to another might come with a payment and/or a high (but sometimes short-lived) rate of interest. Interest rates and promotions vary, so evaluate any such offers carefully before choosing a crypto asset service provider.

Crypto assets can also be purchased or traded person-to-person, through decentralized finance (DeFi) services and through crypto kiosks and specialized ATMs. Each trading mechanism has associated risks (e.g., person-to-person purchases and sales may present higher risk of theft and fraud).

NFT marketplaces involve intermediaries that compete on fees and services (such as assistance with minting NFTs), as well as quality and breadth of content and digital experience. Some NFT marketplaces cater only to specific NFTs or specific types of tokens (e.g., artwork, collectibles or video games), and some have a broad range of offerings. You can also gain exposure to the crypto asset sector through purchasing ETFs or other ETPs, or stock in public companies, that invest in crypto assets, are involved in crypto asset-related activities (e.g., the mining of crypto assets) or otherwise derive their value from crypto assets.

Stocks, ETFs and other ETPs are securities and, as such, are regulated by the SEC. Individuals who sell these products must be registered. You can use FINRA BrokerCheck to research the background and experience of investment professionals and firms that buy and sell securities for customers. 

Storing and Securing Crypto Assets

Crypto assets are entries on a blockchain ledger, and blockchain technology depends on what is known as “private key encryption” schemes. In these arrangements, messages are encrypted and decrypted using pairs of “keys” that are generally represented as alphanumeric strings or hexadecimal sequences. Each pair consists of a “private key” and a related “public key.” These two keys work in tandem, but it’s the private key that essentially acts as a personal password. Accordingly, storing and securing crypto assets mainly comes down to storing and securing the relevant private keys that control those crypto assets. 

Some crypto investors use a service provider (generally called a “custodian”) to store on their behalf the private keys that control their crypto assets, and other crypto investors “self-custody” by holding the relevant private keys themselves.

Custodians and investors who self-custody use a variety of technologies (known as “wallets”) to store private keys, including general purpose computers (e.g., cell phones, tablets and PCs) running specialized programs known as “software wallets”; separate devices (e.g., flash drives or other storage devices, often with built-in security) known as “hardware wallets”; and printouts of the private keys—or QR codes for the private keys—known as “paper wallets.” Some wallets, called “hot wallets,” are connected to the internet, while others, called “cold wallets,” are not.