It’s no secret that cryptocurrency and financial regulation have had a slightly turbulent relationship over the last few years. Regulators have been working to establish clear rules that allow for the quickly evolving technology to be effectively implemented into wider markets while navigating potential risks to investors – although this hasn’t been happening fast enough for some.
Part of minimizing the potential risk of any financial product is to ensure it is marketed in a way that makes sure investors have the right information to decide whether or not to invest in that product, and what the inherent risks might be. A recent release from FINRA shared that, after a two-year examination of how member firms were communicating around crypto products, 70% of those communications broke the rules – resulting in their crypto communications being confusingly cryptic.
Under review
Over the span of two years, FINRA officials reviewed more than 500 cryptoassets-related retail communications distributed by its broker-dealer member firms, those that “actively communicate with retail customers concerning cryptoassets and cryptoasset-related services”. The investigation aimed to assess whether the “marketing material, blog posts, and other publicly distributed information” violated FINRA Rule 2210.
Concerningly, the examination “identified potential violations in 70% of the broker-dealer’s communications about crypto”. While “a handful” of the examined firms were said to have distributed most of the communications that violated the rule, it’s a concerningly high percentage of communications when those on the receiving end of the materials are the investing public.
What is FINRA rule 2210?
The rule violated is FINRA Rule 2210 (Communications with the Public), a rule designed to prohibit firms from making “claims that are false, exaggerated, promissory, unwarranted, or misleading”. The Rule also “prohibits omission of any material … if the omission … would cause a communication to be misleading”.
The bottom line of the Rule is that the communications broker-dealers use to market their services to the public must be “fair and balanced” and provide a “sound basis for evaluating the facts regarding any product or service” – something that FINRA found the firms had failed in around their crypto communications.
The practices that FINRA observed to be in violation of Rule 2210 included:
- Failure to clearly differentiate between cryptoassets offered through an affiliate of the member or another third party, and products and services offered directly by the member itself
- False statements or implications that cryptoassets functioned like cash or cash equivalent instruments
- Other false or misleading statements or claims regarding cryptoassets
- Comparisons of cryptoassets to other assets (e.g., stock investments or cash) without providing a sound basis to compare the varying features and risks of these investments
- Unclear and misleading explanations of how cryptoassets work and their core features and risks
- Failure to provide a sound basis to evaluate cryptoassets by omitting clear explanations of how cryptoassets are issued, held, transferred, or sold
FINRA’s summary of its findings includes two lists of questions firms can use to self-assess to ensure their crypto communications are above board.
Clearing up crypto marketing
This latest development is part of a wider regulatory crypto crusade to ensure that currencies and products are being marketed to the public transparently, and do not present a risk to investors – all of which continue in the same “fair and balanced” vein as FINRA’s expectations.
FCA
In June 2023, the Financial Conduct Authority (FCA) introduced new rules for firms marketing crypto assets to help investors understand the potential risks products can present. The rules require that firms:
“Must ensure that people have the appropriate knowledge and experience to invest in crypto. Those promoting crypto must also put in place clear risk warnings and ensure adverts are clear, fair and not misleading.”
Discussing the new rules, Sheldon Mills, Executive Director, Consumers and Competition at the FCA, said:
“’It is up to people to decide whether they buy crypto. But research shows many regret making a hasty decision. Our rules give people the time and the right risk warnings to make an informed choice. Consumers should still be aware that crypto remains largely unregulated and high risk. Those who invest should be prepared to lose all their money.”
Similar to FINRA’s findings, on October 8, 2023, the FCA issued a warning citing three common issues with how crypto products are marketed, which included:
- Promotions making claims about the ‘safety’, ‘security’, or ease of using crypto asset services without highlighting the risk involved
- Risk warnings not being visible enough due to small fonts, hard-to-read coloring, or non-prominent positioning
- Firms failing to provide customers with adequate information on the risks associated with specific products being promoted
The FCA has said it will continue to work with businesses “including social media platforms, app stores, search engines, and domain name registrars to remove or block illegal promotions”.
SEC
The Securities and Exchange Commission has been a little more ‘broad brush’ with its efforts to ensure “fair dealing” than focusing solely on crypto (although the Commission has been engaged in lengthy wrangling around approving crypto funds and taking enforcement actions against crypto platforms). The SEC introduced its ‘Marketing Rule’ in late 2022 as an Amendment to Advisers Act Rule 206(4)-1, aimed at “prohibiting any false or misleading statements in advertisements” and broadening the scope of what counts as advertising.
And the Commission has already shown it is prepared to make good use of the Marketing Rule to move against non-compliant firms, hitting nine with $850,000 of fines in September 2023. The enforcements were taken as a result of firms including “hypothetical performance” metrics in their advertising, while targeting a “mass audience” that included those whose “financial situation and investment objectives” the advertising may have risked potentially misleading. Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, summarized:
“Because of their attention-grabbing power, hypothetical performance advertisements may present an elevated risk for prospective investors whose likely financial situation and investment objectives don’t match the advertised investment strategy … it is therefore crucial that investment advisers implement policies and procedures to ensure their compliance with the rule.”
It is a reasonably safe assumption that the SEC will seek to apply the Marketing Rule to crypto firms’ advertising as well as finance firms more broadly. In its 2024 Examination Priorities, the commission highlighted it will be focusing on “investment advice provided to clients – especially where such advice concerns complex or high-cost investments, unconventional strategies, or ‘older investors’”. Current confusion around crypto would certainly place investment advice related to crypto products within this wheelhouse. The SEC seeks to ensure “any advice given is in the client’s best interest, is suitable, and avoids conflicts of interest” – once again, echoing the “fair and balanced” requirement from FINRA.
The messaging from regulators across the board is consistent and comprehensive – firms cryptically communicating their crypto commodities need to come correct and convey crystal clear correspondence – or be confronted with considerable condemnation.
