The United States Financial Industry Regulatory Authority (FINRA) has revealed that about 70% of retail communications concerning cryptocurrencies violate its rule of misleading claims.
According to an official report, FINRA identified communications that failed to provide sound bases for evaluating digital assets by excluding explanations of how they are issued, held, transferred, and sold.
Misleading Crypto Communications
FINRA’s findings come from an exam launched in November 2022, which targeted crypto firms that actively communicate with retail investors over crypto assets and related services to evaluate their practices.
The financial regulator assessed over 500 communications distributed by member firms concerning assets offered by affiliates or third parties for compliance with FINRA Rule 2210.
The FINRA Rule 2210 prohibits false, exaggerated, promissory, unwarranted, or misleading communications and is also against the omission of information that would cause a communication to be deceptive. The rule requires that broker-dealer communications with the public be fair and balanced.
Among other things, FINRA discovered a failure to differentiate in communications, crypto products, and services offered through an affiliate or the member itself. A vast majority of the communications were inconsistent with FINRA Rule 2210.
The financial authority found false statements or implications that cryptocurrencies functioned like fiat or equivalent instruments. Some firms likened crypto to other assets like stock investments, omitting a sound basis to compare their different features and risks.
On top of that, the examined companies misled investors to believe that the protections of the federal securities laws, the Securities Investor Protection Corporation (SIPC) under the Securities Investor Protection Act (SIPA), and FINRA rules applied to crypto assets.
FINRA discovered an abundance of unclear and misleading explanations of how crypto works, including its core features and risks.
The regulatory authority recommended considerations for fair and balanced communications, including information about the volatility, the potential for investors to lose their entire portfolio, and the extent to which protections from designated agencies will apply.
“Member firms may consider the information in this update in developing new, or modifying existing, policies and procedures that are reasonably designed to achieve compliance with relevant regulatory obligations based on the member firm’s size, business model, or practices,” FINRA advised.