New York Securities Fraud Lawyers Blog
In recent times, we have seen an increase in retail investors wanting to invest in cryptocurrencies. However, the unknown and unregulated aspects of the cryptocurrency world may deter retail investors from owning cryptocurrency coins and tokens outright. A seemingly safer way curious retail investors can invest in crypto is to purchase and hold crypto based securities at their brokerage firm. Retail investors may see this as a mode to protect the investments against additional volatility and to provide some sort of oversight, but should be wary. If your broker recommended crypto based securities that were not in your best interest, you should reach out to a Crypto-Securities law firm in New York, like Malecki Law.
Additionally, with recent crypto spot ETF approvals by the SEC (first – Bitcoin, and second – Ether), we may see integration of crypto based securities into retail investors’ accounts at traditional brokerage firms. In fact, many investments you already own may have their own exposure to crypto.
In line with the growing interest in owning crypto based securities, it seems as though more single purpose brokerage firms that sell only crypto based securities continue to enter the investment markets, like Galaxy Digital Partners, LLC or Grayscale Securities, LLC.
Single purpose brokerage firms are broker-dealers that may only offer one type asset class or have a very limited selection of securities offerings. For example, Galaxy offers a small amount passive funds, active funds, and venture funds. At a single purpose broker-dealer, there are usually no reasonably available alternatives to recommend investors outside of its own limited offerings. Therefore, a single purpose broker-dealer cannot cater to all retail investors. If you followed your financial advisor from a traditional brokerage firm to a crypto based securities firm, as some of our clients have, and only have experience investing in stocks and/or bonds, you may have been sold securities against your best interest. If this sounds familiar and you sustained losses, you should consult with a Crypto-Securities attorney in New York, like the lawyers at Malecki Law.
Single purpose broker-dealers apply for “special purpose broker-dealer” (SPBD) status. Approximately three to four years ago, the idea of a SPBD entered the scene. On December 23, 2020, the SEC requested public comment on this topic. The SEC approved this class of broker-dealer in authorizing them to solely hold crypto based securities. The SEC indicated that if a SPBD applicant was to be approved by FINRA, then it would not only be able to custody crypto based assets, but it could transact in them as well. Did your advisor recommend that you invest in crypto based securities? Did he/she gather investor profile information, like your risk tolerance and liquidity needs? If you suffered losses from these products, it is possible they were wrongfully sold to you in the interest of your advisor ahead of your best interest. You can reach out to a New York Crypto-Securities Lawyer, like the lawyers at Malecki Law, to review the performance of your crypto based securities.
Prometheum Ember Capital LLC was the first approved SPBD by FINRA, in May 2023. The approval meant that Promethus would become a “qualified custodian” and would have to comply with federal securities laws, in stark contrast with its competitor crypto exchanges, which have to comply with state securities licensure requirements. Falling under federal securities laws would create more stringent requirements for the firm’s policies and procedures, in hopes to provide investor protection and prevent fraudulent behavior.
The second firm that has recently entered the SPBD scene, goes by the name of tZero Group Inc. Due to the firm’s approval of SPBD status, it is now required to treat any crypto token as a security irrespective of how the issuers define the crypto token. Were crypto based securities the cause of substantial losses in your brokerage accounts? You can have a Crypto-Securities law firm, like Malecki Law in New York, review your portfolio and situation to determine whether you have a viable claim in FINRA arbitration.
It will be interesting to see if other single purpose firms that solely offer crypto asset based securities apply for SPBD status. On one hand, it may appear to offer more comfort and safety for prospective investors, comfort that may be illusory. On the other hand, the investment firm must comply with the SEC’s and FINRA’s laws, rules, and regulations not applicable to investments directly in crypto in a largely unregulated market.
Contributions by Jacqueline N. Candella, Associate at Malecki Law