Cryptocurrency, the digital gold rush of our times, has hit a regulatory snag. The Financial Industry Regulatory Authority (FINRA) has unleashed a thunderbolt in the form of a report: approximately 70% of crypto-related communications are tangled in a web of violations. These aren’t just minor missteps; they’re serious breaches involving false, exaggerated, and misleading claims.
In November 2022, FINRA turned its regulatory lens towards member firms engaged in crypto communications. The mission? To ensure compliance with Rule 2210, a cornerstone in the realm of public communications. This rule isn’t just a guideline; it’s the bulwark against misinformation, mandating that communications must be fair, balanced, and fact-based.
The Cryptic Challenge of Crypto Compliance
The scrutiny was rigorous. Over 500 crypto asset-related communications were dissected, revealing that a significant chunk failed to differentiate between products offered by the member firms and those by third parties or affiliates. The lack of clarity didn’t stop there. These communications often misleadingly equated crypto assets to cash or similar instruments, and comparisons with other asset classes like stocks or cash were made without a sound basis.
This fog of confusion extended to explanations about how crypto assets operate. Key details about issuance, holding, transfer, and sale were often omitted, leaving investors in the dark. Furthermore, some communications falsely implied that crypto assets were shielded by federal securities laws or FINRA rules, and some even misrepresented the extent of protection under the Securities Investor Protection Corporation.
FINRA’s 2024 Report: A New Chapter in Crypto Oversight
This development dovetails with FINRA’s 2024 Annual Regulatory Oversight Report, marking the first time a section is devoted to crypto assets. As a self-regulatory body under the SEC, FINRA’s mandate is clear: to oversee securities broker-dealers. This report is more than just a document; it’s a critical tool for member firms to refine their compliance programs.
The report casts a wide net, covering crypto asset developments and advertised volumes among 26 topics. It targets firms involved or planning to be involved in crypto-related activities, guiding them through the intricate maze of SEC compliance. This includes a comprehensive checklist for assessing if a crypto asset is a security, measures for cybersecurity, and anti-money laundering protocols.
Retail communications, a critical aspect of customer engagement, have shown a significantly higher rate of non-compliance compared to other products. This highlights the need for heightened vigilance and adherence to regulatory standards.
FINRA’s role and practices could be further influenced by an upcoming Supreme Court decision regarding the SEC’s use of in-house judges. This decision, expected in 2023, could have repercussions for FINRA, which also employs in-house judges for member-related cases. This follows a 2023 ruling by the Court of Appeals for the District of Columbia Circuit against FINRA’s use of these judges.
In sum, FINRA’s report serves as a stark reminder of the growing pains of the crypto industry. The high rate of non-compliance in crypto communications underscores the need for rigorous oversight and adherence to regulatory standards. As the industry continues to evolve, this report and subsequent regulatory actions will play a pivotal role in shaping the landscape of cryptocurrency and its integration into the broader financial system.
