The United States Financial Industry Regulatory Authority (FINRA) recently released a report revealing concerning statistics about the retail communications concerning cryptocurrencies. The report stated that around 70% of these communications violate FINRA’s rule of misleading claims. This article analyzes the findings from the report and highlights the areas of concern.
In November 2022, FINRA launched an examination targeting crypto firms that actively communicate with retail investors. The purpose was to evaluate their practices in relation to crypto assets and related services. The examination involved the assessment of over 500 communications distributed by member firms, focusing on assets offered by affiliates or third parties.
FINRA Rule 2210 prohibits false, exaggerated, promissory, unwarranted, or misleading communications. It also prohibits the omission of information that could cause a communication to be deceptive. The rule requires broker-dealer communications with the public to be fair and balanced. The report revealed that a vast majority of the communications examined were inconsistent with FINRA Rule 2210.
One of the main issues identified by FINRA was the failure to differentiate crypto products and services offered through an affiliate or the member itself. Many communications falsely suggested that cryptocurrencies functioned like fiat or equivalent instruments. Some firms even likened cryptocurrency to traditional assets like stock investments, without providing a proper basis for comparison of their features and risks.
Another concerning finding in the report was that the examined companies misled investors to believe that the protections of federal securities laws, the Securities Investor Protection Corporation (SIPC), and FINRA rules applied to crypto assets. This misinformation may have led investors to make uninformed decisions and put their investments at risk.
FINRA also discovered an abundance of unclear and misleading explanations of how cryptocurrencies work, including their core features and risks. This lack of clear information can contribute to misunderstandings and potentially expose investors to unnecessary risks.
In light of their findings, FINRA recommended that member firms consider their report when developing or modifying policies and procedures to ensure compliance with regulatory obligations. They specifically highlighted the importance of fair and balanced communications and the inclusion of information regarding volatility, the potential for investors to lose their entire portfolio, and the extent of protections from designated agencies.
The report by FINRA raises significant concerns about the misleading claims made in retail communications concerning cryptocurrencies. It is crucial for crypto firms to address these issues and provide accurate and transparent information to investors. By doing so, they can contribute to a more trustworthy and reliable crypto industry.
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