The United States Financial Industry Regulatory Authority (FINRA) has disclosed that nearly 70% of retail communications related to cryptocurrencies fail to meet its standards due to misleading claims.
According to an official report, FINRA’s examination uncovered communications that lacked adequate information for evaluating digital assets, as they omitted details on their issuance, storage, transfer, and sale.
These findings stem from an examination initiated in November 2022, focusing on crypto firms actively communicating with retail investors regarding cryptocurrency assets and related services.
The financial regulatory body reviewed more than 500 communications distributed by member firms regarding assets offered by affiliates or third parties to assess compliance with FINRA Rule 2210.
FINRA Rule 2210 prohibits deceptive, exaggerated, unwarranted, or misleading communications and also prohibits the omission of information that would make a communication deceptive. The rule mandates that broker-dealer communications with the public be fair and balanced.
Among its findings, FINRA noted a failure to distinguish between crypto products and services offered through an affiliate or the member itself. The majority of these communications were inconsistent with FINRA Rule 2210.
FINRA’s examination revealed false statements or implications that cryptocurrencies functioned similarly to fiat or equivalent instruments. Some firms likened crypto to other assets like stocks without providing a solid basis for comparing their distinct features and risks.
Additionally, the examined companies led investors to believe that protections from federal securities laws, the Securities Investor Protection Corporation (SIPC) under the Securities Investor Protection Act (SIPA), and FINRA rules applied to crypto assets.
FINRA also identified numerous unclear and misleading explanations of how cryptocurrencies operate, including their fundamental features and risks.
As a response, FINRA recommended guidelines for fair and balanced communications, including information about volatility, the potential for investors to lose their entire portfolio, and the extent to which protections from designated agencies would apply.
FINRA advised member firms to consider this information when developing or modifying policies and procedures to ensure compliance with regulatory obligations, taking into account their size, business model, or practices.