FinTech

The following are some key Fintech areas monitored by FINRA’s Office of Financial Innovation ("OFI") that are impacting the securities industry:

Digital Assets

The term "digital asset" generally refers to cryptocurrencies and other virtual coins and tokens (including virtual coins and tokens offered in an initial coin offering ("ICO") or pre-ICO) and any other asset that consists of, or is represented by, records in a blockchain or distributed ledger —including securities and non-security products.

The market for digital assets has grown significantly and has increasingly been of interest to retail investors. At the same time, investor protection concerns exist, including incidences of fraud and other securities law violations involving digital assets and the platforms on which they trade. FINRA has been closely monitoring these issues as broker-dealers, regulators, and investors become more active in this space.

Two emerging areas that OFI has been monitoring include decentralized finance ("DeFi") and non-fungible tokens ("NFTs"). DeFi generally refers to the ecosystem of financial applications being built on blockchain networks. These applications may run ‘smart contracts’ to perform financial services via open-source computer code without a central authority. An NFT is a type of digital asset that has unique identification codes and metadata such that it cannot be exchanged for an equivalent asset. There has been significant growth in the number of NFTs created and transactions involving NFTs, as well as some attempts to create fractional interests in NFTs and pooled assets holding different NTFs. A number of these developments in the DeFi and NFT markets hold potential implications for the securities industry, and OFI is monitoring them.  

FINRA continues to provide guidance on digital assets through various methods, including its joint statement on Broker-Dealer Custody of Digital Asset Securities and white paper on Distributed Ledger Technology, as well as seek information regarding broker-dealer activity in this space through Regulatory Notice 21-25. In addition FINRA keeps investors informed through investor alerts and related information.

RegTech (Regulatory Technology)

Regulation is a fundamental pillar of financial services, ensuring investor protection, and market integrity. Increasingly, these firms are turning to innovative regulatory technology ("RegTech"), whose application include compliance monitoring, fraud prevention, data management (access, storage, and reporting), and identification and interpretation of regulation.

RegTech tools offer the potential to help firms meet compliance obligations in a faster and more cost-effective way, but may also pose several unique challenges. FINRA published a white paper on RegTech to provide firms with a roadmap of key regulatory and implementation considerations as they explore RegTech tools, followed by a RegTech Conference and podcast to facilitate dialogue among regulators, thought leaders, and practitioners on the topic. In addition, FINRA hosted a RegTech Conference and published a RegTech podcast to facilitate a dialogue amongst regulators, thought leaders, and practitioners on the topic.

In addition, FINRA has issued a Special Notice discussing its machine-readable rulebook initiative designed to enhance firms’ compliance efforts, reduce costs and aid in risk management.  As part of this initiative, FINRA has created a prototype of a rulebook search tool—the FINRA Rulebook Search Tool™ (FIRST™).

Artificial Intelligence

Artificial Intelligence ("AI") generally refers to the "intelligence of machines," or the science of computers performing tasks that have been traditionally performed by humans based on human intelligence. AI is generally used as umbrella term to encompass various types of specific technologies such as machine learning, deep learning, and natural language processing. AI, in its various forms, is rapidly being incorporated into the financial services industry, ranging from automated customer service applications and social media sentiment-based trading to sophisticated fraud and financial crime surveillance.

FINRA is seeking to better understand the various AI applications being explored by the securities industry, the benefits offered by such applications, as well as related challenges such as supervision of AI-based tools. FINRA published Special Notice 7-30-18, seeking comments from the industry on the topic. FINRA also published a white paper on Artificial Intelligence in the Securities Industry and hosted an accompanying AI Conference in November 2020.

Quantum Computing

Quantum computing refers to various technologies based on principles of quantum mechanics, such that typical “bits” in code can hold two or more states at the same time. The result is more powerful computing capabilities compared to traditional computing, as well as the potential to address certain intractable problems in optimization- and pattern detection-style problems that exist within the financial industry. In light of the potentially transformative impact that quantum computing may someday have on the securities industry, OFI is seeking to better understand the opportunities and risks presented by quantum computing, including potential applications for quantum computing being explored in the securities industry and attempts to addresses the potential threats to cybersecurity posed by developments related to quantum computing. 

Digital Investment Advice

Digital investment advice generally refers to digital tools that help automate the process to develop an investor profile, to prepare proposals and sales materials, to develop an asset allocation, and to recommend specific securities to an investor. Those recommendations may be for individual securities, a customized portfolio, or a pre-packaged portfolio for investors with a given profile. These investment advice tools can be used by financial professionals or by clients, with many client-facing tools often referred to as "robo advisors" or "robos."

For more information, please refer to the FINRA white paper on Digital Investment Advice, as well as investor alerts on automated investment tools and SEC guidance on robo advising.

Social Media Sentiment Investing

Over the past few years, a new ecosystem of social media sentiment investing companies have emerged that aim to help investors predict market changes using social media sentiment analytics and facilitate communications through social networking platforms.

Different business models have emerged in this space, including social media data analytics companies, social media sentiment-based product issuers, crowdsourced research networks, and social networking platforms. While these tools may offer some benefits to investors and other market participants, they also pose several risks. For more information, please see FINRA’s investor alerts on social sentiment investing tools, investing and social media, and tips and resources to consider when using social media platforms for investing information.

Cybersecurity

Cybersecurity generally refers to the information-security controls at securities firms. FINRA expects that broker-dealers, regardless of size, develop their cybersecurity programs. This includes but is not limited to cybersecurity controls in branch offices; methods of limiting phishing attacks; identifying and mitigating insider threats; penetration-testing programs; and establishing and maintaining controls on mobile devices.

To support efforts to protect data and the systems on which it is stored, FINRA has issued a number of information notices to raise awareness on imposter websites, fraudulent phishing emails, and distributed denial of service attacks. FINRA investor alerts also serve as additional resources, covering tips for investors to protect their financial data, as well as the questions they should raise with their brokerage to better manage their data. FINRA also published an Information Notice on authentication methods that firms may consider to protect investors’ and firms’ confidential information.

Gamification

Gamification generally refers to the application of "game-like" elements and principles to non-game situations. As investors increasingly conduct financial transactions using laptops, tablets, and mobile phones, the design and function of online websites and mobile applications ("platforms") have become intrinsic to broker-dealers’ interactions with customers. Examples of gamification features used by some platforms include but are not limited to games at sign-up; social networking tools; streaks with prizes; points, badges, and leaderboards; and notifications. These features and similar ones may influence investors’ actions as they navigate through platforms and engage in various activities, including opening accounts, selecting investments, and trading. As a result, FINRA is monitoring the use of gamification and related design features in the securities industry and gathering information related to the potential benefits and risks related to these features.

Cloud 

Cloud computing refers to the delivery of information technology ("IT") services using internet technologies in a way that is elastic, scalable, and may be priced on a pay-as-you-go basis. Core services include data storage, processing capacity, networking, and software applications. 

Cloud computing is transforming how broker-dealers operate by providing opportunities to enhance agility, efficiency, resiliency, and security within firms’ technology and business operations while potentially reducing costs. At the same time, firms are seeking to address certain key considerations in moving to the cloud. These include items such as developing the right protocols and skills base to maintain cloud security and fostering the right firm culture to fully take advantage of the offerings of cloud.  

Considering both the opportunities and challenges presented by cloud, OFI is actively engaged on this topic to better understand the implications of cloud computing on the securities industry. FINRA also published a white paper on Cloud Computing in the Securities Industry in August 2021 and hosted an accompanying Cloud Conference in March 2022.

Related Publications & Resources

OFI White Papers

• Cloud Computing (2021)
• Artificial Intelligence (2020)
• Regulation Technology (RegTech) (2018)
• Distributed Ledger Technology (2017)
• Digital Investment Advice (2016)

FINRA Information, Regulatory, and Special Notices to Industry

• Special Notice 10-21-22 (2022) – FINRA Requests Comment on Its Machine-Readable Rulebook Initiative
• Regulatory Notice 21-25 (2020) - FINRA Continues to Encourage Firms to Notify FINRA if They Engage in Activities Related to Digital Assets
• Information Notice 10-15-20 (2020) - Cybersecurity Background: Authentication Methods
• Regulatory Notice 20-23 (2020) - FINRA Encourages Firms to Notify FINRA if They Engage in Activities Related to Digital Assets
• Special Notice 7-30-18 (2018) - FINRA Requests Comment on Financial Technology Innovation in the Broker-Dealer Industry

Investor Alerts

• Following the Crowd: Investing and Social Media (Jan. 29, 2021) 
• The Ins and Outs of Initial Coin Offerings (Sept. 22, 2020)
• Social Sentiment Investing Tools—Think Twice Before Trading Based on Social Media (Apr. 3, 2019)
• Here's How to Avoid Crypto Stock Scams (Sept. 6, 2018)
• Initial Coin Offerings (ICOs)—What to Know Now and Time-Tested Tips for Investors (Aug. 16, 2018) 
• Getting a Handle on Virtual Currencies (May 31, 2018)
• Know Before You Share: Be Mindful of Data Aggregation Risks (Mar. 29, 2018)
• Don’t Fall for Cryptocurrency-Related Stock Scams (Dec. 21, 2017)
• Bitcoin Basics—9 Things You Should Know About the Digital Currency (May 24, 2017)

Podcast, Videos, and Blogs

• FINRA Unscripted | A New Tool for Compliance: FINRA’s Machine-Readable Rulebook Initiative (February 7, 2023)
• FINRA Unscripted | The Journey to the Cloud: Implications for the Securities Industry (March 24, 2021)
• FINRA Unscripted | AI Virtual Conference: Industry Views on the State of Artificial Intelligence (Nov. 24, 2020)
• Conference Panel | Developments in the Digital Assets Market (July 1, 2020)
• Media Release | Artificial Intelligence: A New, Old Trend Transforming Financial Services (June 10, 2020)
• FINRA Unscripted | The Buildathon: Creating New Technology in Service of Investors (Nov. 12, 2019)
• FINRA Unscripted | The Future of RegTech: The Challenges and Opportunities (Feb. 5, 2019)
• Media Release | FINRA Launched the Innovation Outreach Initiative (Aug. 1, 2018)