The United States Financial Industry Regulatory Authority (FINRA) recently unveiled shocking statistics on the state of retail communications in the cryptocurrency industry. According to an official report, an astounding 70% of retail communications violate FINRA’s rule on misleading claims. These communications failed to provide investors with accurate and comprehensive information, leaving them vulnerable to making uninformed decisions. This revelation sheds light on the urgent need for stricter regulations and improved transparency within the crypto space.
During an extensive examination launched in November 2022, FINRA scrutinized over 500 communications distributed by member firms. The objective was to evaluate the practices of crypto firms that actively engage with retail investors in relation to cryptocurrency assets and associated services. The findings were deeply concerning, as many of these communications neglected to include essential details about how cryptocurrencies are issued, held, transferred, and sold. This omission prevented investors from making informed assessments of digital assets, thereby increasing their exposure to potential risks.
One of the key regulatory guidelines for broker-dealers, FINRA Rule 2210, prohibits false, exaggerated, promissory, unwarranted, or misleading communications. It also stresses the importance of providing balanced and fair information to the public. Unfortunately, a significant majority of the examined communications blatantly disregarded this rule. Notably, some firms misleadingly compared cryptocurrencies to fiat or equivalent instruments, falsely implying that they functioned in the same manner. This false equivalency neglected to acknowledge the substantial differences in features and risks between traditional assets and cryptocurrencies.
Another distressing discovery made by FINRA was the prevalence of misleading implications regarding the level of investor protections offered for crypto assets. Many communications misled investors into believing that federal securities laws, the Securities Investor Protection Corporation (SIPC) under the Securities Investor Protection Act (SIPA), and FINRA rules applied to cryptocurrencies. These claims were not only misleading but also exposed investors to potential harm due to a false sense of security.
Furthermore, the report highlighted numerous instances where communications failed to provide clear and comprehensive explanations of how cryptocurrencies function, including their core features and associated risks. This lack of clarity leaves retail investors ill-equipped to make informed decisions and increases the likelihood of financial losses.
Following their examination, FINRA put forth several recommendations for member firms to improve their retail communications practices. These suggestions aim to promote fairness, transparency, and responsible information dissemination within the cryptocurrency industry. Key considerations include providing information about the volatility of cryptocurrencies, warning investors about the potential for substantial losses, and clearly explaining the extent to which protections from designated regulatory agencies apply.
The alarming rate of misleading claims in retail communications regarding cryptocurrencies is a significant concern for both investors and regulators. The findings of FINRA’s examination highlight the urgent need for improved transparency, clearer explanations, and stricter adherence to regulatory guidelines. It is essential for member firms to heed FINRA’s recommendations and develop robust policies and procedures to ensure compliance with relevant regulatory obligations. Only through such proactive measures can the cryptocurrency industry foster a more trustworthy and secure environment for retail investors.