FINRA Finds 70% of Crypto Communications Violate Regulations

A recent probe by the Financial Industry Regulatory Authority (FINRA) uncovered rampant regulatory violations in crypto asset marketing communications.

After reviewing 500 retail-focused examples, FINRA discovered that 70% potentially breached existing rules around truthful promotion and disclosure obligations.

The findings spotlight compliance shortcomings in how the crypto sector markets unfamiliar, complex digital assets to less-informed mainstream investors.

Top Violations: Misleading Claims and Insufficient Risk Disclosures

FINRA enforces regulations that brokers and financial advice providers must follow when advertising investment products. This includes prohibitions on false claims or omitting real risks.

However, upon inspecting crypto asset promotions, FINRA found the following:

• 70% contained possibly misleading statements exaggerating potential gains
• Many lacked balanced disclosures around loss risks
• Some falsely implied coverage by SIPC investor protection schemes

This indicates that firms are systematically overstating benefits while downplaying drawbacks of crypto investments through communications. Ira Gluck of FINRA told the authority’s podcast that analysts specifically tracked violations of Rule 2210, which requires truthful and appropriate disclosures.

The high incidence rate aligned with prior FINRA experience signaling issues in the sector. However, the extent of non-compliant crypto promotional content still proved striking.

Dangers for Mainstream Investors

FINRA’s findings have important implications for everyday investors exploring high-risk crypto opportunities without full information.

False assurances around government protections or returns could misguide households allocating their life savings. This may expose families more if crypto markets reverse or promised payouts fail to materialize.

Deficient warnings mean that participants underestimate wipe-out dangers, given crypto’s inherent volatility. Pervasive violations risk distorting the understanding of risk-reward tradeoffs in digital assets among non-expert investors.

Broader Concerns Around Crypto Compliance Culture

The increasing frequency of compliance issues identified by FINRA goes beyond mere marketing concerns, pointing to potential deeper cultural problems within the cryptocurrency industry. 

Recent high-profile incidents, including billionaire losses and exchange hacks, have cast doubt on the effectiveness of self-regulation in the sector.

The chronic pattern of overemphasizing potential rewards while minimizing risks suggests a troubling ethical trend among registered brokers involved in the cryptocurrency market. 

This raises broader questions about the industry’s commitment to ethical standards and the persistence of a less-regulated ethos reminiscent of the “Wild West” culture in crypto’s history. 

Addressing these issues is crucial for building trust and ensuring a more responsible and ethical crypto ecosystem.

Conclusion

FINRA discovered that 70% of crypto promotional content violates existing regulations. Market players still need to meet disclosure and ethics standards expected from financial services companies.

Such shortcomings may stem from firms prioritizing quick asset growth over appropriate controls as crypto investing opens to mainstream households.

Yet, without balanced information setting realistic expectations, these investors remain highly vulnerable to aggressive selling, hacking, or volatility.FINRA’s findings suggest that regulatory examinations should rigorously continue shining light on industry practices to drive better investor protection.

Otherwise, misguided inflows risk harm from an asset class they likely do not fully comprehend yet.

Adarsh Singh is a true connoisseur of Defi and Blockchain technologies, who left his job at a “Big 4” multinational finance firm to pursue crypto and NFT trading full-time. He has a strong background in finance, with MBA from a prestigious B-school. He delves deep into these innovative fields, unraveling their intricacies. Uncovering hidden gems, be it coins, tokens or NFTs, is his expertise. NFTs drive deep interest for him, and his creative analysis of NFTs opens up engaging narratives. He strives to bring decentralized digital assets accessible to the masses.