SS&C Technologies Holdings, Inc. (SSNC) Earnings Call Transcript & Summary

Over the next hour, we will explore the latest regulatory guidance on digital assets. After which, we will have 30 minutes dedicated to answering any questions that have been submitted in the Q&A. But before we begin, I just wanted to cover a few housekeeping items. The slide window, media player and engagement tools on your screen are adjustable in size and movable, so feel free to move them around and customize your desktop space for today. The tool bar at the bottom allows you to minimize any of these features. Please note that some networks cause slides to advance a little bit more slowly than others, so logging off your VPN is recommended. If your slides are behind, pushing the F5 on your keyboard will refresh the page. And then one of the greatest features of webinars is that you have direct access to expertise. So if you have any questions during today's session, feel free to submit them through the Q&A engagement tool, and Bill will be answering them live with us today in those last 30 minutes. For those of you that are joining us for the first time, the Learning Institute is a division of SS&C dedicated to providing continuing professional education within the financial industry. From webinars facilitated by subject matter experts through a library of online courses, we're dedicated to ensuring financial professionals have the resources they to excel. Today's session, we'll be hearing from our industry expert, Bill Jannace. Bill has over 30 years of professional experience in the securities industry having held positions at the American and New York Stock Exchanges and FINRA, as well as being an adjunct professor, instructor and lecturer at various schools of higher learning, both domestically and abroad. So we're very pleased to have him join us today to share his insights. And with that, I will hand it on over to you, Bill, to get us started.

Okay. Great. Good morning, everyone. Good morning. It's a pleasure to be speaking to everyone on a very timely topic and a very volatile. So I have some good news, and I have some even better news. Some of what we're going to discuss on the presentation today has already been slightly outdated or will be potentially because the Senate and the Congress just proposed the Responsible Financial Innovation Act, Senator Gillibrand and Lummis, so I will be integrating that into the discussion. And it certainly -- I will certainly direct you to points that you want to consider when we go through the presentation. So it's very timely. It's also very timely given the volatility in the marketplace and what has taken place to talk about some of the regulatory issues with the closing of Hydra, the dark net, by the DOJ and the German regulators as well as various major pieces of legislation and just -- legislation and regulatory issues like the Ripple case that is going right now before the SEC and the courts, which may have major impacts. So we'll talk a little bit about the regulatory approach, FINRA rules and applicability to broker-dealers and outside accounts, the DLAs, compliance guidance and the Biden administration, and then FinCEN guidance with regard to convertible virtual currencies. And I would note that with respect to virtual currencies, the area in general, digital assets, because in light of what has happened in Ukraine with the Russian invasion, there has been a lot of concern about what is called a digital leakage or crypto leakage and the idea of circumventing economic sanctions. So we'll talk here about fintech inclusivity. And I understand you've had some courses on product knowledge. So I just want to give you an overview with respect to, I guess, regulatory and other implications. And digital technology, obviously, transforming the financial industry, payments, savings, borrowing and investment services and fintech and big tech companies compete with banks and other incumbents across various markets. So it's got a lot of positive impact, distributed ledger technology, right, it's a kind of a greater platform for inclusivity and decentralization of finance and innovation. At the same time, because of the amount of assets that were growing in this area, there's a lot of concern from regulatory oversight. And you're starting to see a bit of a correction in the market in the sense that last year -- at the end of last year, early this year, the crypto space or digital was -- I think, market cap was around $2.9 trillion. Because of the volatility and the correction in the stock market, particularly high tech, which the digital asset space was able to leverage, you're down to below $1 trillion. And there's still some concern that it might be more significant to clients. And while I speak about the positives about financial inclusion, the access to and the wide range of reasonably priced financial services, I've had the good fortune to work in a lot of emerging markets, East Africa and the Balkans and Asia. And the utilization of digital payment systems, digital banking has really increased and potentially increased empowerment, gender equality and also financial and economic development. And that was just a caption from a period around -- for 6 years, about 1.2 billion adults gaining access. And obviously, the digital technology, the disintermediation is able to help what we call the fanner or the small folder type of borrower that doesn't have the type of financial records or financial resources that a lot of other borrowers may have. So that's the good. This is sort of like a Clint Eastwood movie, there's the good, there is the bad and then there is the ugly. So blockchain and crime, the research -- this was from MIT a couple of years ago, and then I have some more current and some more disturbing news, unfortunately. 25% was estimated that bitcoin users were engaged in illegal activity, comprising nearly half of all bitcoin. Over $500 million worth of bitcoin went to illegal marketplace on the dark web. So you may have heard of Hydra, which the DOJ just shut down with the German regulators, the -- a market, a dark net that was using for illicit drugs, trafficking and other maligned activity. And the cryptocurrency enabling the illicit arms trade, roughly $80,000 worth of illicit arms trade on the dark web. North Korea, Pegasus Group utilizing this to circumvent economic sanctions and to build its nuclear capabilities. And you've seen this steady downward trend in illegal activity. I think the idea of looking at it as not just strictly positive but with a greater degree of cynicism. So the MIT study had shown that by 2019, 2% of bitcoin activity could be categorized as illicit. But I would just make note that -- and if you get a chance, the Hydra market, right, the indictment of the charges, it had noted that 80% of all dark net-related cryptocurrency transactions were done on Hydra. And since 2015, it had received over $5.2 billion in cryptocurrency. And the estimates were quite significant for the Pegasus Group in terms of the ability to circumvent economic sanctions to build its nuclear capability. And when we get to SEC regulation and oversight of cryptocurrencies, the Responsible Financial Innovation Act just proposed this past week, put some of this into flux. So let me just expand a little bit. So IRS, right, looks at digital as property. Traditionally, the CFTC's commodity. The Infrastructure Act of last year is actually making amendments to the Form 8310 reporting on digital assets and currency in Form 1099-B. So the amount, it's kind of not just this currency but something of digital value. If it exceeds $10,000, within 15 days, you're going to be required to make a report on that Form 8300 and that kicks in about 2024. So the days of much more anonymity or flying below the radar, I think, are probably coming to an end. So just as an FYI. And then with respect to the CFTC, the commodities, so the SEC, Chairman Gensler, right, has been very, very proactive. He has a very ambitious agenda, regulatory. And he's viewed that more regulation and the exchanges should be regulated, right? So you had the Binance, which has been -- has had a lot of trouble there, a foreign exchange that circumvented U.S. SEC regulation. It's only touchpoint, when it had a U.S. operating subsidiary, then it gets scoped -- it got scoped into U.S. regulation. So Chairman Gensler had been very, very proactive about -- think about promoting the idea of having the digital exchanges under SEC rather than at CFTC jurisdiction. So the Responsible Financial Innovation Act speaks about this idea of ancillary versus the typical U.S. security jurisdiction and essentially creates much more of a divide for CFTC regulation if something is deemed to be an ancillary security, ancillary asset vis-a-vis a typical U.S. security. I would just add over here on FINRA Digital Asset Report, in 2018 and 2019, they had issued notices to members through 18-20 and 19-24, essentially asking firms to be proactive and come to FINRA about any type of activities they were contemplating or their associated persons. So any of you that are -- work for FINRA registered BDs know that they have a membership, very robust membership process, and they have what is called material consultations. And the change in membership application, where firms that make acquisitions, buy or sell their own stock or expanding their business products, their lines, in many instances, need to get FINRA approval if it's considered to be material. So we'll talk about a little bit more about this in greater detail. The digital asset reports and their Office of Digital Financial Innovation, much more proactive asking firms to come in and speak to them ahead of time about any activity that they're contemplating. So I would make note the Responsible Financial Innovation Act and the Infrastructure Act, to the extent on the compliance or the tax reporting side, are going to have implications here. And in an initial review, some law firms have been out already talking about this, think that it kind of favors or it's a little bit more CFTC oriented and that remains to be seen. And crypto exchanges, what Chairman Gensler spoke about, not putting up proper walls between different parts of their business such as custody, market making, offering a trading venue, those are the classic type of regulatory structures you have in place. So all stock exchanges in the United States under Section 5 of the Exchange Act are required to be registered and they have to meet the requirements of Section 6. And essentially, one of them is essentially to promote what we call Just and Equitable Principles of Trade and to ensure that customers are not being taken advantage of. So the ideas of co-mingling of services, platforms trading ahead, trading against their customers often because they're market making against their customers, so the federal securities laws, the FINRA rules talk about Just and Equitable Principles, anti-touting prohibitions, best execution. These are the type of things that FINRA members that are members of stock exchange, these are the type of rules and regulations that they're subject to. So if you are mainstreaming digital assets and they would meet the Howey Test or the definition of a security under the '33 Act 2A-1 or on the Section 3(a)(11) of the Exchange Act, that would scope in BD registration oversight and SEC jurisdiction, and the -- all the rules and regulations of the FINRA the SEC would be applicable. And raised these issues about Tether, USD Coin and Binance, right? And Binance is not -- we know it's had a lot of issues, right? There's been a lot of issues about the dark net and these ones that Chairman Gensler spoke about. They're founded by platforms to facilitate trading and avoid AML and KYC. So the Binances of the world have been much more reactive and now proactive in this area about addressing AML concerns and FATF and FinCEN, obviously, to close the regulatory loopholes in terms of guidance that FinCEN has put out and in terms of the requirements that FATF has proposed globally with respect to convertible virtual currencies and anything related to digital. And Coinbase, which is an exchange that's registered on the -- and received the SEC approval last year, obviously, the earnings misses and warnings, you're seeing companies like Celsius stop redemptions and you're starting to see a lot of the digital players talk about rescinding job offerings and to retrenching. So unfortunately, some of the -- I guess, the euphoria over digital assets was a function of a very benign Federal Reserve monetary policy, modern monetary theory of printing. And the Federal Reserve, in some respects, some people are arguing, acted as a backstop to the U.S. equity market. So there was this asset class that was created. I think like all asset classes, there's a boom and bust. And I think the bust and the additional regulation would probably help in the long run because the ones that do survive should be -- will be better and more viable and better regulated. And you could see on a more macro level, the central banks now talk really more about wholesale versus retail. Central bank digital currencies recognizing the efficacy, the benefit of the distributed ledger technology. But obviously, with -- very, very seriously concerned about retail touchpoints to address the issues that Chairman Gensler spoke about. And the SEC regulates, as I mentioned to you, the orphaned sales and securities under Section 5 of the Exchange Act, if you're making an offering on an interstate basis. And the SEC in BlockFi recently had raised the issue about registration of crypto lending products. So like all products, there's a lot of innovation. You have the digital asset and then you had the growth. You're looking -- you have players that were involved in this looking to lend out their securities like a typical securities lending. And the idea of offering these without registering raised the issue, so the SEC has taken a very proactive approach. Even though the -- you've done it in more in the diversified space like the ETFs, right, which provide a little bit more diversification and risk mitigation so ETFs. And you're going to see now with the Responsible Innovation Act -- the Financial Innovation Act, probably the dust will settle sooner than later in this area. And the decentralized autonomous organizations, which is essentially the ones that are doing -- issuing the crypto, there was a 21(a) report, so anyone familiar with SEC procedures, a 21(a) report is generally issued in the interest of investor protection. Don't necessarily taking the disciplinary or punitive action that they could have but an opportunity to inform the investing public. And that the idea of the distributed ledger blockchain technology, right, the use of it to raise capital, that existing federal securities laws apply to this new paradigm. It was essentially any offer of sale. And if it's deemed to be a security, right -- and we're going to talk about what an investment contract and Howey is, it scopes it into SEC regulation. Initially, what you started to see with the digital space is what we call utility tokens, right? It's a self-contained ecosystem and it's really not an investment contract. So there was some flexibility in that regard. But then what you started to see is the products taking on the characteristics of a security and greater concerns about this. And the SEC recently increased its digital resources in terms of its staff to address this, right, to be a little bit more proactive in this area. And with that said, it's still an issue that requires a lot of focus and resources. So enforcement actions applied the famous 1946 Supreme Court test, the Howey decision, alleging violations of the Securities Act, the '33, and/or the Exchange Act, if you are a vendor or a platform that's offering securities or receiving securities-based compensation, essentially, you have to register as a broker-dealer or if you bring together market participants, register as a stock exchange. So any of you old enough to remember and I'll stipulate I'm the only one old enough to remember the dot-com boom, you had the same situation where you had direct offerings that were being done on the Internet. And the SEC came in a rather technology-favorable manner and put regulatory guidance around it. There was the famous Spring Street Brewery offering, right, Samuel Adams and all that. And essentially, so that if you're going to use platforms, you're going to make direct offerings, you either have to be a BD or a stock exchange. And the platforms that ended up using it, it was [ Donaldson, Rolfkin, Genred ] and Goldman actually gave their [ in forma ] to this by buying up these technology vendors. And then you have cases against investment advisers and investment companies, so advisers utilizing their discretion or thinking about diversification and digital assets, again, issues with compliance. And I guess the CCO takeaway from what we're talking about, if you look at some of the guidance and some of the public statements that the examination unit has said, I think Mr. Driscoll and others, that today, the role of a CCO is not strictly a pro forma application of rules and regulations that you're putting together a -- on the 206, 4-7 or 38a-1 under the Investment Company Act or FINRA Rule 3110 or Section 15A of the Exchange Act, where you're applying rules and regulations to products and services. But I think there is a growing expectation that CCOs and the compliance function have some underlying knowledge about the products that are really being distributed. So you saw it in the permutations in the kind of the machine learning, artificial intelligence, the robo space, and I think you're starting to see that here. So again, it's kind of what I would call a CCO takeaway. And this concept of what a security is, the Howey, right? So you have the payment. This is Ethereum, there's Ether, it's an investment of money. The common enterprise, right, from investors was pulled. That's what they call horizontal commonality. And curators are people that are involved like miners or the ones that give their smell test, they put their stamp of approval, whether to greenlight these type of projects or what we call vertical commonality. Expectation of profits, reasonable, right? Stood there on profits if it projects -- project has generated cash. And notice these decentralized autonomous organization token holders significantly relied on promoters' efforts based upon statements made by the promoters and the white papers that we use, right? This is kind of like a proof of concept, it's website and internet and social media for them. So when you buy a security, right, when you think about what is the defining feature of a security, right, you're buying Apple or Microsoft, right, you're buying it and you expect to gain capital appreciation and the dividends through the hard work of others, right? You're not doing the rolling up your sleeves and doing the work. So that's kind of one of the distinguishing features of Howey and the Howey Test from 1946. So some of the ideas of security, transferability. Privately placed securities are not freely tradable for 1 year, right, not a security immediately tradable in certain situations or trading venues, right? Venues for securities must be SEC registered as an exchange or alternative trading facilities. And again, if they're not regulated, not a security, SEC registered clearing agent, required -- not if there's -- not if it's not. And remember, any security that's listed on an exchange, right, has to be acceptable to the depository trust. It must be able to be eligible to be created and settled. Then custody, right, registered custodian is required, again, if it's unregulated, not a security. So the SEC recently put out guidance with respect to an SEC staff bulletin on the custody-ing of assets. So what I mentioned to you before about transferability, if it's an unregistered, right, they're not freely tradable. If they're unregistered and immediately tradable, it gives the impression that it's not a security. And again, these could be problematic. So these -- the DAO report, right, the 21(a) report, they noted that federal securities apply to those who offer sales securities in the U.S. regardless whether issuing entity is a traditional company or these decentralized autonomous organizations, right, decentralized decision-making. So a lot of people -- it's not the traditional listed company on a stock exchange with a Board and with management, and whether purchased U.S. dollars are virtual or they're distributed in certified form or distributed ledger technology. So book-entry form today is with the way most securities are or certificates, which have kind of gone not quite as prevalent. And guidance for entities to consider when they have an obligation to safeguard crypto assets, so it applies to SEC reporting companies. So under the federal securities laws, if you're publicly traded, you're listed on the stock exchange, you've done an offering under Section 5, under Section 12, you become a reporting company, which triggers reporting obligations under Section 13 and 15D of the Exchange Act. And then in situations, if you have a significant number of shareholders and you break the 2,000 minimum where you get an exemption, you still become a reporting company, right? So applies to reporting companies that have submitted or filed a registration statement, not yet effective, so it's prospective guidance, and the technological, legal, regulatory risk associated with safeguarding digital assets. So the traditional safeguarding of assets under the Securities Exchange Act Rule 15c3-3 is that possession and custody of fully paid securities in a good control location, right, whether it be a bank, a depository, another broker-dealer, it's a little bit more nebulous. I think some people think in terms of the blockchain, right, digital wallets and the -- I want to say, the risk or the ability on hacking and things like that because you've had situations. So again, company, the concern is subject to risks, including an increased risk of financial loss when the companies controls cryptographic keys attached to a user's digital assets. You heard about the story about someone who actually lost their cryptographic keys and literally lost potentially millions of dollars, right? And there was some discussion that the key that perhaps, it was actually thrown away in the garbage and actually looking -- rummaging around the garbage. So exerting control to try to disclose and quantify these obligations, recording the liability in a corresponding asset on their balance sheet. So stock record and things of that nature, right? And again, I think what you'll see is that FINRA and SEC guidance will posture, right? If there is an issue on the 15c3-3, obviously, the brokerage firms that are under SEC and FINRA regulation, there's interpretive guidance is always the ability to file or request no action relief if there's something that is in the gray area. So these are important considerations to take into consideration. So we have a poll here. If a security is purchased with a virtual currency or distributor with blockchain technology, is it subject to SEC laws? And I would tell you, I'm having coffee, and I expect everyone, given the depth of this presentation and some of it, obviously, is heavily regulated, you probably need coffee by now. This answer, I think, about a week ago, would have been a little bit more clear cut. Now I think with the Responsible Innovation Act, I think it's probably -- it could be a little grayer. But do we have any takers on this so far?

So let's give it about 30 more seconds, and then we'll launch the results.

Okay. Great. Yes. I would -- like I said, I would direct you to the discussion on the Responsible Financial Innovation Act to the idea of ancillary -- what are ancillary versus what will be scoped into under the Howey Test. So I think there is going to be a little bit overlap. [Voting]

Yes. I mean, I would say -- and I agree with yes, and I also agree with no. I don't want to sound like an attorney, I'm arguing both sides of the case. I would say before the Responsible Financial Innovation Act, yes would have been 100%. I think now because of this little gray area with ancillary assets and how that plays out, and -- but here on the operative word, it says it's a security, right? It's purchased using the currency or distributed with blockchain, the operative word is security. So that's why I would go with yes because the operative word is security. It's kind of a -- it's implicit, a little bit. All right. But again, I wouldn't be discouraged. Like I told you, with the Responsible Financial Innovation Act, I think there's going to be a little bit of -- a little gray coming off horizon. All right. So FINRA regulation and the SEC-SRO regulatory pyramid, right? We have the SEC at the apex, you have FINRA, then Municipal Securities Regulation Board. [ We'll make ] in Board the New York Stock Exchange [ while we work ] at American as well that are SROs. And obviously, responsibility for compliance flows downward in life, right? Member firms today, less than 3,300. When I first started in the industry, it was about 5,000. I think that gives you an idea about consolidation and the growth of decentralized finance and financial innovation. Obviously, the branches are subject to FINRA and SEC regulation, and firms enforce compliance with SEC and SRO rules. And notice the reporting obligations for output in an SRO self-regulatory model, financial, whether on the 17a-11, there could be an issue with net capital compliance or operational. And obviously, customer complaints. So it will be interesting to see what type of customer complaints with the sell-off in the market in general, I expect or I'm speculating that the number of arbitrations, that should go up dramatically. There's always an inverse relationship. As the market is doing well, generally, the number of customer complaints and arbitrations tend to go down. And this kind of downward-upward flow, I think it's a little -- probably a little bit more flexible now in this area because the SEC has its financial innovation hub. FINRA has its Office of Financial Innovation, and there's much more of a proactive approach. And even globally, what you're seeing today in the area of digital assets is the sandboxes, right? So the Bank for International Settlements, which it's a good website to look at on cutting edge on products and a macro perspective on digital asset regulation, they have all created global sandboxes, right, financial innovation hubs, where you can actually come in to discuss potential technologies and products you're using. And even FinCEN on the AML side has a financial innovation hub itself, trying to get the best technology vendors in as well. And B, these broker-dealers can be liable for failing to supervise their associated persons with a view towards preventing securities law violation on the Section 15B4E, and there is a safe harbor under Section 15B6, a safe harbor if you can demonstrate your established procedures. And the operative word in supervision is reasonably, right? It's not absolute, reasonably be expected to detect and prevent violations. The supervisor reasonably discharge his or her duties under the system. They do not have a reasonable cause to believe procedures were being violated. The SEC standard is a little bit more -- it's not quite as stringent than the SRO standard for the most part. So just to understand the schematic, the SEC sets minimum standards and the SROs have the latitude to be more stringent. The SEC under Section 15B4E requires a predicate violation. Technically speaking, under SRO standards, if you don't have WSPs that cover all of your products and services, in theory, in theory, you can be charged with failing to supervise. And except for Section 15G of the Exchange Act, insider trading policies and procedures. So an interesting thing, there is a case now going on. There was an insider trading case that was brought alleging violations of the mail wire fraud, not the insider trading, but dealing with insider trading in the non-fungible token space. So again, if you're thinking about going or expanding into these areas, think about all the procedures, so insider trading policies and procedures. Classic, you're thinking about securities, M&A. Acquirer-acquiree, there was a situation where you had this. So it was -- and it was brought not under the federal securities laws but under the interstate, the mail fraud acts. And requires a firm to establish and maintain a system to supervise the activities of its associated persons, that's APs. Again, reasonably designed to achieve compliance with applicable rules and to reasonably design WSPs, written supervisory procedures, to supervise the activities of its APs and the types of business in which it engages, right? So when we get into -- we'll talk about private securities transactions and OBAs, that's clearly issues that come up that -- in this space that could raise problems. So among other things, the WSPs address the supervision. The supervisory personnel provide for a review of the firm's investment banking, securities business, correspondence, internal communications, customer complaints. And an interesting thing, in the Ripple case, right, because of a former SEC official from the Division of Corporation Finance coming out and speaking about what would constitute a security, and obviously, securities exchange registration, there's been this massive amount of discovery between Ripple and the SEC looking to see, internally, who weighed in on that speech to see if there were any contradictory or any differing opinions on what was the final product, right? So when you're talking about communications and attorney-client privilege and all that, again, we're talking about the structuring, compliance wise. You have compliance that if there is a business counselor and you have general counsel's office on the other side, think about how you want to structure things because there have been cases where general counsels now and CCOs have been held liable or charged for failing to supervise. The classic supervisors are not only fair game. And these WSPs describe specific individuals responsible, activities, the frequency of the reviews and whether it's risk-based in matter of documentation. So to the extent, let's say, on the AML side, for example, given what has happened in the last year with Kabul and Afghanistan and there's been report about the use of digital assets, digital platforms to circumvent sanctions and crypto leakage, and then you're hearing the same things coming out of Ukraine, there has been a -- I think from the technology side and from other perspectives, to think about more of a geographical mapping and analytics to your AML compliance and looking for a geographical stress point. So if you are a global operation and you have a touchpoint in the Middle East, the Caucuses, the Balkans where there could be fallout from Ukraine, or in Central Asia or Southeast Asia, or from Afghanistan, again, these are the type of things that you ratchet up and change based upon your business footprint. So 3270, outside business activities; and 3280, the private securities transactions, they're often read in tandem, require RRs to notify their firms in writing of proposed outside business activities and associated persons to notify their firms in writing a proposed private securities transactions, so firms can determine whether to limit or allow, right? And from approving a PST, where the associated person has or may receive selling compensation, must record and supervise the transaction as if it were executed on behalf of the firm. Now why is this important? So the outside business activities, clearly, if you're a registered rep and you're teaching a class on wealth management, and it seems relatively benign, it doesn't present a problem. You could say yes and no because possibly, you might be onboarding clients that are taking some type of financial literacy or basic class, and maybe they wouldn't ordinarily meet certain suitability standards or options or things like that. If you were running a hedge fund on the side, a private investment fund, you could certainly straddle, right? You could -- whatever you did in your hedge fund, right, you could buy an advanced trade, front run or trade ahead of what you do in the fund or what you're doing with your -- and your broker-dealer had. And then I think what's really important in terms of private securities transactions, right, if you are associated with a firm and you're looking to get involved in digital assets, right, outside the ordinary course of business, your scope of business, people still might say, well, you are associated or a registered rep with the firm and might connote or might think that, that product, that digital product, is subject to all the regulatory safeguards of FINRA and the SEC. That's some of the genesis. That's why it's important. And that's why FINRA has asked in its guidance in the regulatory notices in 2018, '19 and '20 to be much more proactive and come in and to discuss these things. So it encourages firms to promptly notify it, if its associated persons or affiliates engages or intends to engage in any activities related to digital assets, such as cryptocurrencies and other virtual coins. This is over and above FINRA general requirements. And notify FINRA when it or its associated persons or affiliates currently engages or intends to engage in any activities. And again, some of this might already be required in the sense that if you are a broker-dealer and you're looking to expand your business model, and it's material in terms of the amount of people that you're onboarding or the scope of your activity, under the FINRA membership rules, you might have had an obligation anyway. So again, a much more proactive approach. Not necessarily stifling activity, but trying to do it in a regulatory responsible fashion. And the activities of interest to FINRA, if undertaken or planned by a member, right, that's a firm, its associated persons or affiliates, include, but not limited to, purchases, sales, execution of transactions, digital assets, purchase sales execution in a pooled fund investing in digital assets, creation of management provision, advisory services for a pooled fund related to digital assets, purchase sale, right, transaction derivatives, any type of futures options, anything related to digital assets, right, creation, management of a platform for secondary trading, custody. And now there is SEC guidance, acceptance of cryptocurrencies from customers. The issue obviously is volatility, right? So it would be hard to make an argument, right, that you could use the bitcoin as a cash equivalent given the volatility, right? I mean the -- we know from the last financial crisis, money markets, '40 Act money markets intend to be $1 NAV, but we've had the breaking of the buck. Acceptance of cryptocurrencies, and that's what happened with Terra, that's why they're being sued. Stablecoin right, that broke the 1:1 dollar parity. Acceptance, mining of currencies, recommending, soliciting, accepting orders. And just like if you were in the area of securities, right? If it's not on the firm's recommended list and things of that nature, right -- again, firms have policies about not recommending securities that are followed by it. Indications of interest, quotations, facilitating clearance and settlement, recording of currencies using DLT, right? Again, a much more inclusive and proactive approach. And continued interest in firms handling notifications regarding it and not requesting notification information regarding passive investments or activities, right? That's the classic mutual fund of '40 Act, right? As a former regulator, right, you essentially -- you don't want regulators to be actively trading, and a lot of firms discourage their employees from actively trading as well. So FINRA acknowledge that SEC -- that market participants wishing to custody assets may find it challenging to comply with the BD financial responsibilities rule. So that's 15c3-1. So net capital compliance, you're in it 24/7, you carry assets, right, proprietary positions, subject to haircuts and undue concentration charges, right, and then you have to maintain possession and control of fully paid or excess margin securities. And again, these issues now with the digital assets, significant technological enhancements, so the idea of developing, right, an approach as opposed to just completely closing it off is the approach that's being taken right now. So we have a quick poll here. If a firm engages in digital asset activity, it must only meet minimum FINRA rule requirements? So as a former regulator, I think you would always tell people, well, not only did you have to comply with the rules. But if there are red flags and other issues, right, you should ratchet it up. I mean that's essentially how the idea of cooperation works, right? The idea of incentivizing firms over and above. So in this situation, right, minimum FINRA rule requirements, right? What do you think? If you have OBAs and PSTs, right, you essentially comply with 3270 and 3280, not necessarily reporting them up to FINRA, unless they fall into the scope of a materiality consultation under the FINRA membership rules or require a change in membership application, what we call a continuing membership application, CME. All right. So let's see. We're probably close to getting some answers here. [Voting]

I would say the best answer is false. Not -- at a minimum, 3270 and 3280 doesn't necessarily require you to tell that to FINRA. So 3270 and 80, those type of activities, now they want more proactive communication with FINRA. So yes, I would tell you that meeting the minimum might not necessarily carry the day for you. So the Department of Labor, right, announced -- Fidelity announced it will offer employer-sponsored 401(k) plans, the option to invest in bitcoin, making it the first retirement plan. The DOL caution the fiduciaries to exercise extreme care before they consider adding a cryptocurrency to a 401(k) plan, right? Concerns about its volatility, right, it's efficacy and all the other regulatory issues. And again, this announcement was made a little bit before the implosion. And it's an interesting thing, you still see in the area of bitcoin, companies like Microsoft Strategy, it's a technology firm that has doubled down on its bets in this area. But again, that's not in a ERISA-regulated plan. So again, there is some caution and there's been some consternation over this. And the concerns about cryptocurrency's products that tie -- or value tied to them, present risks, challenges of fraud, theft, loss due to speculative volatile nature. And the custodial record-keeping concerns, right, they're not held like the traditional plan assets and entrust a custodial. Again, the SEC guidance and FINRA might help in that regard. But again, the pension plans, it's a little bit more of a concern. You're talking about people's somewhat -- in addition to their IRAs and other things, their livelihood. So again, this was announced before the implosion and it remains to see how this is going to play out. And cryptocurrencies, right, right time and position. You look at less than 3 months, this is the dark, the blue, and then more than 12 months, the gains, right? They did quite well. Bitcoin, you saw the -- and the derivatives, right, the spot, which is day-to-day. And again, a lot of activity while the markets in general were going up and you had, relatively speaking, a benign interest rate environment. So with the markets selling off of late, there has been a necessary or a resulting contraction in this asset space. And the Biden administration's executive order. So President Biden and Vice President Harris have been extremely active in issuing executive orders. In addition to digital assets, they issued 2 that are -- I'd just make note because there is a -- cryptocurrency would be a touchpoint. They issued executive orders with respect to corruption, focusing on AML and related issues. And they issued one on climate change as well. And again, when you're talking about digital assets, one of the big issues, right, is the mining. It's energy intensive. So you might have seen in The Financial Times and The Economist, these charts that show that bitcoin mining uses more -- emits more greenhouse gas emissions than individual countries. And that's why you're seeing now with the increased -- significant increase in energy prices, countries like Russia, Iran, that are energy rich and need to offload are looking to invite miners to do that because it's energy-intensive, vis-a-vis, China, which has got environmental issues. So the ideas of, on digital assets, consumer investment protection and the Responsible Innovation Act not only covers SEC and CFTC deals with IRS. It also deals with the Consumer Protection Board and other regulators, financial stability because of the volatility in this. Illicit finance, again, the use -- the Hydras was closed. Some of the -- some of it by the Department of Justice and the German regulators, digital leakage and crypto leakage. Leadership in global financial system and economic competitiveness. So the genesis, right, and I'm sure you've had this on your prior webinars on the product development side, was to essentially create an alternative to central bank fiat currencies, right? Concerns may be about U.S. overreach in terms of it being a reserve currency status and the use of the dollar, the weaponization and the concerns and the growing of the U.S. deficit. So I mean it's anecdotal. You could understand why people are concerned. A few years ago, about 71% of the foreign exchange reserves were held in the U.S. dollar. It kind of dropped down to 59%. The RMB, which is not a fully convertible, has toggled up from 10% to the 4%, 5% slot. It kind of moves back and forth with Japan. And financial inclusivity, so the Federal Reserve and others have been promoting the idea where you have underrepresented communities, communities of color that didn't have traditional access to banking, that it would obviously be a methodology of platform to do that. And we're seeing that, obviously, globally. So the United Nations has got various platforms with other partners to -- and to encourage financial inclusivity on a global level. And then innovation, right? So you have Central Bank digital currencies more on the wholesale level. The efficacy of blockchain on clearance and settlement could drive down cost. The only one issue, and it's something that I think about, is that if you get to the issue of straight-through processing, we go from T3, T2, T1 to STP and you have insider trading and you don't have that lag where you can get a TRO. But I assume that, that will be worked out. Again, innovation, these are important things. And the U.S. Central Bank digital currency, very highest on urgency for research and development efforts and federal regulators and agencies, reports, evaluation, strategic plans. A lot of activities congealing in this area. Again, there's a pullback a little bit on the retail side, but the idea -- because one of the issues when you have a central bank digital currency is that you have the disintermediation. So there's those shock absorbers that -- to the system, right? An analogous situation for many years, you had a floor-based trading system, New York Stock Exchange, and you have brokers that traded market makers that kind of acted as speed bumps. Today, when you've gone from a proprietary model, right, what we call RFQ to kind of a central limit order book, you're seeing the volatility playing out not only in equities but debt post Dodd-Frank. So again, these are -- innovation does have sometimes some drawbacks. And the global government action against cryptocurrencies, right, bitcoin ban, bitcoin banking ban, Doc Brown, and bitcoin payment ban, and there's been a lot of concerns. And again, this will change. The use of the stablecoins that are tied to fiat, again, the Terra where there's the algorithmic one and the traditional one, they've kind of imploded and there's a lot of concerns now about this. So again, like every bull market and every bubble, it burst and they're probably the stronger ones that will be surviving. So FinCEN guidance, obviously, Financial Crimes Enforcement Network issued guidance in 2013 about crypto exchanges and other actors formed within the definition of money transmitters. You might have heard the money service bureaus. Appropriate AML and KYC, right, so this is the idea of not circumventing. So Binance, its defense was that we're regulated by FinCEN, so you can back off of us. And again, that makes -- that's somewhat compelling on a superficially, but not necessarily -- it doesn't carry the day when you start to retailize. Whenever you have retailization of a product, it's often a bad sign that there is a bubble that will burst. If you look historically, when you see massive retailization of products that were in the institutional space, sometimes, it's a harbinger of declines. And the guidance, right, it intended to clarify the regulations on the BSA, right, virtual currency and medium of exchange and operates like a currency in some environments. It does not have all the attributes of a real currency, so a convertible virtual currency, which either has an equivalent value in real currency or acts as a substitute for real currency. And the virtual currency is not a money service business under FinCEN, therefore, not subject. But again, some of this is changing a little bit. So just make a note. It's an evolving landscape. Define the use as a person that obtains a virtual currency, an administrator or exchanger is an MSB under FinCEN, so a money transmitter unless a limitation or exemption from the definition applies, so a person engaged in the business of virtual currency is someone who's just doing an ad hoc transaction. And the regulations provide whether a person is a transmitter, as a matter of fact, and circumstances provides the communications or the network access acts as a payment processor to facilitate the purchase or payment operates of the currency. Clearance and settlement, physically transports currency, right, so you have the travel rule, which is $3,000 in the U.S. Again, if you go in abroad and bringing it back or whatever, you're not able to wash your hands off responsibilities from FinCEN or FATF for that purposes, so the transporting of the currency and other commercial paper of value that is a substitute and engaged in the business and they delineate. And the guidance, the one we talk about, excludes a person such as the futures commission merchant that is registered or regulated by the CFTC. And again, with the RIA, some of this will play out. So in 2019, FATF provided guidance on AML, issued guidance regarding crypto exchanges to conduct material KYC. And you know in the area of KYC and AML, generally, we've gone from CIP/KYC to now continuous due diligence to get to ultimate beneficial ownership and, essentially, subjects you to what is called enhanced due diligence today, right, EDD. So we've gone to that. And FinCEN expressed concern about the use of cryptocurrencies in connection with illicit activity, the majority of ransomware-related payments. So OFAC has noted that sanctions have increased, targeted at individuals and entities, using virtual currency in connection with maligned activities. And so must the crypto exchange have AML and KYC risk monitoring programs in place? That's -- it should be a pretty -- that's a give-me, I would think. I will tell you one thing. If you don't, you'll probably have an audience with the FinCEN and the SEC. All right. I guess we're closing in on this. And I mentioned in the Binance situation, you had them actually saying that since they were complying with FinCEN guidance. [Voting]

Yes. I would say, yes, is the stronger answer. The ones that are foreign exchanges that didn't have a touchpoint in the U.S. would try to make that argument. But now I don't think you'd be able to make a compelling argument. The other thing I just want to alert you to is that FinCEN has what they call ruling examples. So they've issued guidance. It was in 2014, ruling guidance 1 and then 2 in 2014 and 3, 4 and 5 in 2014 as well, Q&As on cryptocurrency. So again, these are things to just take into consideration. So key highlights to remember from today, and obviously, if are there any questions, a key highlight I would tell you is that there is probably an opportunity now to kind of massage and weigh in on some of the regulation. It's been out there, it was proposed. It's going to have to be implemented by regulators. So their rule-making process will probably be somewhat detailed. And if you're familiar with SEC and FINRA rule-making process, it's subject to notice and comment. So to the extent the CFTC, SEC and FINRA are proposing rules to comply or force the proposed rules to comply with the new -- or the Responsible Financial Innovation Act when it gets implemented, it's an opportunity for firms to kind of weigh in and provide some guidance in that regard. And then I would tell you is that there is a new approach today to not only digital but because of digital and because of the ubiquity of sanctions today, that AML, a lot of regulators and people are talking about AML and sanctions compliance, right, should be kind of much more 360. And the 2 areas should be talking to each other more because of this kind of overlap and this kind of convergence that you're starting to see. So anyone that's thinking about it or in that area that works maybe in one discrete area, you might want to think about how these things are starting to play out. And then a related issue, a highlight is that because of the use of technology like on the AML side, there's increased cyber risk, right? So this concept -- these words you might hear, robotic processing automation and a sequential use of technologies to achieve compliance, kind of raise the zone of threat that you have for cyber hacking and cyber attacks and kind of the use of third-party vendors, know your vendor, know your data, data governance is very important to try to get that. And then to the extent on your compliance, a highlight to remember. On your compliance function, the integration of AML in the product control area and whether they actually have veto authority with all these things that are going on, so these are some considerations to think about.

Thank you, Bill. I think we've got a couple of questions that have come on through. So Morgan is asking, what are the chances that the SEC will allow spot ETFs?

I tell you, I have no inside knowledge. I don't see anything happening right now because of the volatility and the -- for lack of a better word, the sell-off or the bursting of the bubble. I can't see too much progress going forward. It's a perfect opportunity now with the volatility just to rethink things a little bit.

Okay. Great. Thank you. And then another question came through from Scott. Besides risk of principals, why does an inflationary environment hurt bitcoin and Ethereum valuations?

Why does it or doesn't it?

Why does an inflationary environment hurt bitcoin and Ethereum valuation?

Well I think there's 2 ways to look at it. It's that an inflationary environment necessitates higher interest rates. So if you have higher interest rates, you're going to constrict liquidity in the markets, right, because the markets have been liquidity driven, particularly since the last financial crisis. You've had a, relatively speaking, a benign interest rate environment for the better part of 13 years and one can argue going back to 2001, since 9/11 when the Federal Reserve was pretty open and then was slightly restricted when Bernanke was first onboarded. So to the extent that you've had this kind of liquidity tsunami, it just spilled over into other asset classes and help drive. If you look at, by analogy, the index model, right, which, let's say, 9.9%, 10% a year, the market goes up, you had a lot of money going into the alternative market, right, PE, private equity hedge fund, illiquids. So there was -- once that got priced out, a lot of money in there, you've had that. So I think that's one of the issues there. And then I think -- and like I said, I'm more on the regulation side. But if you look at the modality, the way it operates, right, there's the kind of the halving principle. So the cost of energy raises the cost of mining. So you have the -- once the large vendors that could withstand it, so like a bitcoin at $30,000, they're quite profitable, a little bit lower, but the small ones can't. So the cost of energy will impact the profitability. And then with that halving, right, unlike a fiat currency, right, the more you use a fiat currency, the more you grease the wheels of finance. There's the utility benefit of that, right, the agency benefit. In this situation, there's more congestion. It's like mitosis. The more people you have mining, the more it raises, of course. So I think it's the operations, the model, the way it operates, and I think the inflationary environment with energy is going to impact the bottom line.

Okay. Great. Well, thank you very much, Bill. We appreciate your time and sharing your expertise in this subject. And thank you again to everyone that joined. Please look out for a follow-up e-mail. We're going to have an evaluation survey in there. We'd love to get your feedback on today's session. You'll see us here, we're hosting our next 2 webinars on the SPAC collapse and the recent inflationary environment, which is a hot topic. So we hope you will be able to join us again to continue the conversation. And with that, we will let you get back to the rest of your day. Thank you again so much, Bill. We appreciate you.

My pleasure.

Thank you, everyone. Have a great rest of the day.

Thank you.