- FINRA did a targeted review of member firms’ crypto asset communications.
- 70% of the crypto-related communications showed rule violations.
- Misleading claims and unclear explanations about crypto assets are primary issues.
Just as the crypto industry secured a major regulatory win with the Spot Bitcoin ETF approvals, new pitfalls are emerging. Major corporate watchdog recently revealed that most material promoting crypto to retail investors may violate financial regulations.
The Financial Industry Regulatory Authority (FINRA), a non-profit organization overseen by the SEC, has conducted a review that found that as much as 70% of communications regarding crypto are potentially in violation.
FINRA’s Examination Finds Rampant Violations in Crypto
In November 2022, FINRA started a meticulous examination to scrutinize the compliance of member firms’ communications to retail investors about crypto assets. The findings, published on Tuesday, January 23, 2024, were striking.
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More than 500 crypto asset-related communications were put under the microscope, revealing that 70% exhibited potential violations. These communications, predominantly distributed by a handful of firms, were assessed for compliance with the stringent standards set by Rule 2210.
Specifically, Rule 2210 guards against misleading claims, exaggerated promises, and omitting material facts that could lead to public deception. The potential infractions ranged from false implications that crypto assets function like cash or cash-equivalent instruments to unclear and misleading explanations of the fundamental features and risks associated with crypto assets.
Moreover, the report highlighted concerns over certain communications’ failure to differentiate between crypto assets offered through affiliates or third parties and those directly offered by the member itself.
Implications of FINRA’s Findings on the Crypto Industry
FINRA’s discovery of widespread non-compliance necessitates a comprehensive overhaul of communication strategies by member firms. Companies must invest in better compliance infrastructure, including training for staff and robust review mechanisms, to ensure all communications meet regulatory standards and are free from misleading content.
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The findings will also likely attract more scrutiny from regulators like the SEC, potentially leading to stricter regulations and oversight. This can mean more rigorous audits, higher penalties for non-compliance, and an overall tightening of the regulatory framework within which crypto businesses operate.
On the Flipside
- The 70% figure, while significant, is not representative of the crypto industry as a whole. This is because the communications come from a non-representative sample of FINRA members.
- These findings give the industry a chance to develop self-regulatory practices and standards.
Why This Matters
The report from FINRA comes at a pivotal time for the crypto industry, especially in the wake of major regulatory approvals like the Spot Bitcoin ETF. The high non-compliance rate means that firms must take special care in how they communicate with retail investors.
Read more about the state of crypto regulation in the US:
SEC Faces Mounting Legal Challenges as Regulations Tighten
Read more about Solana’s recent performance:
Solana Dropped 10% Today, Will the Downward Spiral Continue?
