The Reality of Misleading Claims in Cryptocurrency Communications

The Reality of Misleading Claims in Cryptocurrency Communications

The United States Financial Industry Regulatory Authority (FINRA) has recently conducted an examination that revealed some concerning trends in the world of cryptocurrency communications. According to FINRA’s report, an astonishing 70% of retail communications related to cryptocurrencies were found to be in violation of its rule against misleading claims. These communications failed to provide the necessary information for evaluating digital assets, omitting crucial details about their issuance, storage, transfer, and sale.

In November 2022, FINRA initiated a comprehensive examination targeting crypto firms that actively engage with retail investors in communicating about crypto assets and related services. The objective was to evaluate the practices of these firms and ensure compliance with the regulatory standards set by FINRA. Over 500 communications distributed by member firms were assessed in terms of their compliance with FINRA Rule 2210, which prohibits false, exaggerated, promissory, unwarranted, or misleading statements.

Unfortunately, the findings of the examination revealed significant shortcomings in the communications of these crypto firms. FINRA detected a widespread failure to differentiate between crypto products and services offered by an affiliate or the member firm itself. This lack of distinction led to inconsistent messaging and misleading statements, violating the principles of fair and balanced communication as required by FINRA Rule 2210.

One of the most alarming discoveries made by FINRA was the prevalence of false statements and implications that cryptocurrencies functioned similarly to fiat or equivalent instruments. Some firms even went as far as likening crypto to other traditional assets like stocks, disregarding the need for a nuanced understanding of the different features and risks associated with each asset class. Another concerning aspect was the misleading information provided to investors regarding the applicability of federal securities laws, the Securities Investor Protection Corporation (SIPC), and FINRA rules to crypto assets.

FINRA also noted that many of the explanations provided about the workings of cryptocurrencies were unclear and misleading. Investors were not adequately informed about the core features and risks of these digital assets, leaving them vulnerable to potential losses. To address these issues, FINRA recommended that firms engage in fair and balanced communications by providing information about the volatility of cryptocurrencies, the potential for investors to lose their entire portfolio, and the extent to which protections from designated agencies will apply.

In light of these findings, FINRA advised member firms to incorporate the information from this examination into their policies and procedures. Firms must develop new or modify existing practices that ensure compliance with regulatory obligations. The specifics of these policies should be tailored to the firm’s size, business model, and practices.

The alarming statistics uncovered by FINRA serve as a stark reminder of the importance of responsible and transparent communication in the cryptocurrency industry. It is crucial for firms to provide accurate and comprehensive information to retail investors, helping them make informed decisions. By adhering to the guidelines set forth by FINRA and other regulatory authorities, firms can foster trust and protect investors from the risks associated with misleading claims in cryptocurrency communications.


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