Harbor's Regulatory Wait Ends as FINRA Awards Broker-Dealer License

Harbor's broker-dealer licensing breaks a lengthy standoff between aspiring crypto broker-dealers and the U.S. regulators who approve them.

AccessTimeIconSep 27, 2019 at 10:31 a.m. UTC
Updated Sep 13, 2021 at 11:30 a.m. UTC

Harbor Square Investments, a subsidiary of tokenized securities platform Harbor, has received a broker-dealer license from the Financial Industry Regulatory Authority (FINRA), company executives told CoinDesk on Friday.

The move breaks a lengthy standoff between aspiring crypto broker-dealers and the U.S. regulators who approve them. For more than a year, the Securities and Exchange Commission (SEC) and FINRA slow-walked Harbor's and roughly 40 other crypto firms' applications, voicing concerns that the digital assets they trade causes investors undue risk.

Broker-dealers can buy and sell securities on their own and on their clients' behalves. In the crypto space, a broker-dealer who treats digital assets as securities could bring market them to institutional investors. But they face strict requirements from the SEC and FINRA.

An array of crypto dilemmas – private key access, record-keeping, asset custodianship – stymied the regulators' processing of applications.

“It took the regulators a long time to get a handle on the space and understand it and its implications," Harbor CEO Josh Stein told CoinDesk. “This was very new for the SEC and FINRA, and they wanted to do it right."

FINRA's BrokerCheck web service confirms the news, showing four listings for Harbor Square as of this morning.

Overcoming the blockade

Though financial a newcomer, Harbor adopted a conservative mindset more closely associated with Wall Street banks than Bay Area startups to overcome regulators’ concerns.

Stein said:

“People, processes, and tech. We concentrated on institutional-grade people, institutional-grade processes, and institutional grade tech from the beginning.”

Over a year ago, Harbor’s compliance officers prepared reams of in-the-weeds documents for regulators, who went through the 500-odd pages “with a fine-tooth comb.”

“It’s like writing the War and Peace” of compliance, Stein said. Every process, from the on-boarding of new hires to the documentation of instant messages, and countless others, can be wrapped up in these required filings, called Written Supervisory Procedure.

Harbor also chose familiar faces for its compliance team. The firm’s chief compliance officer, Steve Longo, has worked as a compliance czar for Citigroup and JPMorgan, and sits on FINRA’s continuing education council, according to Stein.

Full-stack services

With its broker-dealer license secured, Harbor plans to become a “one-stop shop” for digital asset issuers.

“We're going to provide the technology platform to manage the fundraising, the technology to manage investors, the technology to tokenize and enable liquidity,” Stein said.

This streamlined process had been impossible before Harbor’s licensure, largely because the firm could only make introductions to partner broker-dealers then.

The firm had been prohibited from handling other key processes, such as performing due diligence, which Stein said issuers want. Broker-dealer status changes that.

Now, “we’ll assemble the BDs, do some interviews, put together all the paperwork, all the due diligence,” Stein said. “All the things that are so difficult today is now a seamless, easy experience.”

The shape of things to come

Harbor’s licensing may carve a path for other digitally native broker-dealers to gain approval, perhaps ending U.S. regulators’ lengthy blockade.

Stein suggested that it's a sign of the maturing industry – and of the SEC and FINRA taking this less-than-a-decade-old asset class more seriously.

“The regulators are saying: ‘Hey, this is a regulated activity that a broker-dealer should go do. They should go sell these digital securities, because that’s perfectly legitimate, appropriate and within the regulations.'”

After Harbor's licensing, Stein said more crypto broker-dealers may break through – “That’s a big deal for the whole industry.”

Josh Stein image via Harbor


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