Cryptocurrency has transformed from a niche market into a mainstream investment asset. With Bitcoin, Ethereum, and thousands of other digital currencies gaining popularity, retail investors are increasingly looking for ways to buy, sell, and trade these assets.
Traditionally, investors rely on retail brokers to facilitate stock and bond purchases. Given the explosive growth of crypto, many wonder: Can retail brokers sell cryptocurrency just like they do with traditional securities?
The answer isn’t straightforward. The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) have strict regulations regarding securities trading.
Their stance on crypto has been cautious, creating challenges for retail brokers who want to offer digital assets.
In this article, we’ll break down the ability of retail brokers to sell crypto, the role of SEC and FINRA, the challenges they face, and what the future might hold.
What Are Retail Brokers?
Gustavo Gabriel Dolfino
The Role of Retail Brokers
Retail brokers are financial service providers that allow individual investors to buy and sell securities like stocks, bonds, ETFs, and mutual funds. They act as intermediaries between the investor and the financial markets. Popular brokerage firms include Charles Schwab, Fidelity, and Robinhood.
Why Retail Brokers Matter in Crypto
Retail brokers play a vital role in traditional investing by making it easy for everyday people to invest in the stock market. If brokers were allowed to sell crypto in the same way they sell stocks, it could make crypto investing more accessible and regulated for the general public.
However, crypto operates differently from traditional assets. While stocks are traded on regulated exchanges like the New York Stock Exchange (NYSE) or Nasdaq, cryptocurrencies are traded on independent crypto exchanges like Coinbase, Binance, and Kraken. This difference is key to understanding why retail brokers face hurdles in offering crypto.
SEC and FINRA’s Stance on Crypto Regulation
What Does the SEC Say About Crypto?
The Securities and Exchange Commission (SEC) is responsible for regulating securities markets in the U.S. It enforces rules that protect investors and maintain market integrity.
One of the SEC’s main concerns is whether cryptocurrencies should be classified as securities. If they are considered securities, then they fall under the same regulations as stocks and bonds.
- Some cryptocurrencies, like Bitcoin and Ethereum, are considered commodities, not securities. This means they fall under the Commodity Futures Trading Commission (CFTC) rather than SEC regulation.
- Other digital assets, like certain altcoins and initial coin offerings (ICOs), are classified as securities by the SEC, meaning they require strict compliance with U.S. securities laws.
Since most cryptocurrencies are decentralized and unregulated, the SEC believes they pose risks to investors. As a result, the agency has taken legal action against crypto companies that fail to follow securities laws.
FINRA’s Role in Crypto Regulation
The Financial Industry Regulatory Authority (FINRA) is a self-regulatory body that oversees broker-dealers in the U.S. Any brokerage firm that wants to offer crypto-related products must comply with FINRA regulations.
FINRA’s requirements for brokers selling crypto include:
- Gaining FINRA approval before offering crypto services
- Implementing strict anti-money laundering (AML) measures
- Providing detailed risk disclosures to customers
- Following SEC regulations if the crypto asset is classified as a security
Since many cryptocurrencies operate outside traditional finance, FINRA has made it difficult for retail brokers to enter the crypto space without significant compliance efforts.
Challenges Retail Brokers Face in Selling Crypto
Even though retail brokers want to offer cryptocurrency, several barriers make it complex and risky for them to do so.
1. Unclear Legal Classification of Crypto
One of the biggest challenges facing retail brokers is the uncertain legal status of cryptocurrencies. Unlike traditional assets like stocks or bonds, which fall under well-defined regulations, crypto exists in a gray area.
Why Is Crypto Hard to Classify?
- Securities vs. Commodities: The SEC considers many cryptocurrencies securities, while others, like Bitcoin and Ethereum, are treated as commodities by the CFTC. This makes it difficult for brokers to know which rules apply.
- Constant Regulatory Changes: Laws surrounding crypto evolve quickly, making compliance a moving target.
- Global Differences: Some countries regulate crypto as currency, others as property, creating confusion for brokers operating internationally.
Until clearer regulations are established, retail brokers face legal risks when offering crypto, leading many to avoid it altogether.
2. Custodial and Security Issues
One of the biggest challenges retail brokers face when offering crypto is secure custody. Unlike traditional stocks, which are held in centralized systems, cryptocurrencies require specialized storage solutions.
Why Crypto Custody Is a Problem for Brokers
- No Central Authority: Stocks are held by regulated clearinghouses, but crypto relies on digital wallets that must be properly managed.
- Risk of Hacking: Crypto exchanges and wallets are prime targets for cyberattacks, putting investor funds at risk.
- Private Key Management: Losing a private key means losing access to the funds permanently, unlike stocks, which can be recovered.
- Regulatory Uncertainty: Many custodial services don’t meet SEC and FINRA standards, making compliance difficult.
Without stronger security solutions, retail brokers struggle to offer crypto safely.
3. Compliance with SEC and FINRA Rules
Retail brokers looking to sell crypto must follow strict regulations set by the SEC (Securities and Exchange Commission) and FINRA (Financial Industry Regulatory Authority). These agencies aim to protect investors and ensure fair market practices.
Key Compliance Challenges for Brokers
- SEC’s Classification of Crypto: If a cryptocurrency is deemed a security, brokers must follow the same registration and disclosure requirements as stocks.
- FINRA’s Approval Process: Brokers must get FINRA’s approval before offering crypto-related products, ensuring they meet risk disclosure and investor protection
- AML & KYC Regulations: Firms must comply with anti-money laundering (AML) laws and conduct Know Your Customer (KYC) checks to prevent fraud.
Without clear guidelines, most brokers struggle to offer crypto while staying compliant.
4. Market Volatility and Investor Protection
Cryptocurrency markets are known for extreme price swings, making them riskier than traditional investments. This high volatility creates challenges for retail brokers and concerns for regulators like the SEC and FINRA.
Why Crypto Volatility Is a Problem
- Rapid Price Fluctuations: Crypto prices can rise or fall by double digits in hours, making them unpredictable for investors.
- Lack of Circuit Breakers: Unlike stock markets, which have trading halts to prevent crashes, crypto markets operate 24/7 with no built-in safeguards.
- Market Manipulation Risks: Without strict regulations, crypto is vulnerable to pump-and-dump schemes and price manipulation.
How Regulators Protect Investors
- Strict Disclosure Rules: Brokers must warn investors about crypto’s risks before selling.
- Regulated Products: The SEC supports crypto ETFs and funds over direct crypto trading to offer more protection.
Until tighter investor safeguards are in place, most brokers hesitate to offer direct crypto trading.
How Some Brokers Are Offering Crypto Despite Regulations
Even with these challenges, some retail brokers have found ways to offer crypto-related products while remaining compliant with SEC and FINRA rules.
1. Partnering with Crypto Exchanges
Some brokers, like Robinhood and Webull, allow users to buy and sell cryptocurrency, but they do not actually hold the assets themselves. Instead, they partner with licensed crypto exchanges, which handle the transactions.
2. Offering Crypto ETFs and Funds
Retail brokers can sell crypto-related exchange-traded funds (ETFs), which provide exposure to Bitcoin or Ethereum without directly holding the assets.
For example:
- Bitcoin ETFs track the price of Bitcoin and trade on stock exchanges.
- Crypto investment funds allow investors to gain exposure to digital assets through professionally managed portfolios.
3. Selling Stocks of Crypto Companies
Some brokers offer stocks of crypto-related companies, such as:
- Coinbase (COIN): a publicly traded crypto exchange
- Marathon Digital (MARA): a Bitcoin mining company
- Riot Blockchain (RIOT): a crypto mining firm
This lets investors gain indirect exposure to the crypto market without directly buying cryptocurrencies.
Will Retail Brokers Be Allowed to Sell Crypto in the Future?
As crypto adoption grows, SEC and FINRA regulations will continue to evolve. Some experts believe that clearer guidelines could allow more retail brokers to offer crypto in the future.
Key developments to watch:
- New SEC regulations that clarify which cryptocurrencies are securities
- FINRA’s approval process for broker-dealers looking to offer crypto
- Advancements in crypto custody solutions that meet brokerage security standards
- More regulated Bitcoin ETFs and crypto funds
While there’s still uncertainty, the demand for crypto investment is strong. If regulations become more crypto-friendly, retail brokers may play a larger role in the digital asset market.
Final Thoughts
Retail brokers face significant challenges in selling crypto due to regulatory uncertainty, security concerns, and investor protection rules.
SEC and FINRA have set high compliance standards, making it difficult for brokers to enter the market.
For now, investors must use crypto exchanges or indirect investment methods like ETFs and stocks of crypto companies. However, as regulations evolve, the future may see more retail brokers offering crypto in a secure, regulated way.
With crypto adoption growing, regulators must find a balance between investor protection and innovation in the financial industry.
One thing is clear: crypto isn’t going anywhere, and retail brokers will need to adapt.
About the Author:
Gustavo Gabriel Dolfino is an accomplished Senior Executive who has worked in complex financial business strategies for a number of clients, both small and large. He has extensive experience with capital markets and corporate finance. His experience includes having provided a range of equity-related financing services through his extensive network of relationships with commercial banks, insurance companies, private equity, and hedge funds. Dolfino has a solid background in business model analysis, mergers and acquisitions, capital markets financing solutions a well as capital raising.
“I am a self-made man and attribute my business achievements to my strong work ethic. I enjoy a challenge and have succeeded in numerous industries, including finance, investment, pharmaceuticals, banking, and higher education.”