FINRA Provides Update on Targeted Exam: Crypto Asset Communications

January 2024

Background

In November 2022, FINRA launched a targeted exam to review the practices of certain member firms that actively communicate with retail customers concerning crypto assets and crypto asset-related services (Crypto Assets).1 FINRA reviewed retail communications received from these firms for compliance with FINRA Rule 2210 (Communications with the Public) which requires, among other things, that broker-dealer communications with the public be fair and balanced, and that they provide a sound basis for evaluating the facts regarding any product or service discussed. FINRA Rule 2210 prohibits claims that are false, exaggerated, promissory, unwarranted, or misleading and also prohibits the omission of any material fact if the omission, in light of the context of the material presented, would cause a communication to be misleading. Similarly, Article 10 of the Securities Investor Protection Corporation (SIPC) Bylaws (Member Advertising) prohibits references to SIPC that might reasonably be deemed misleading.2

This update summarizes initial themes from this targeted exam and poses questions for firms to consider if they use retail communications concerning Crypto Assets. This update does not create new legal or regulatory requirements or new interpretations of existing requirements, nor does it relieve firms of any existing obligations under federal securities laws and regulations. Rather, this update poses questions for firms to consider as they review and supervise their retail communications concerning Crypto Assets. The update also provides links to additional resources. 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 may provide additional information about our review at a later date.  

Initial Themes

In connection with the targeted exam, FINRA reviewed over 500 Crypto Asset-related retail communications. This total included communications distributed or made available by FINRA member firms concerning Crypto Assets that were offered by or through an affiliate of the member or other third party. FINRA identified potential substantive violations of FINRA Rule 2210 in approximately 70 percent of the communications. Specifically, FINRA observed the following communications and communication practices that were inconsistent with FINRA Rule 2210:   

  • Failure to clearly differentiate in communications, including those on mobile apps, between Crypto Assets offered through an affiliate of the member or another third party, and products and services offered directly by the member itself. 
  • False statements or implications that Crypto Assets functioned like cash or cash equivalent instruments. 
  • Other false or misleading statements or claims regarding Crypto Assets. 
  • Comparisons of Crypto Assets to other assets (e.g., stock investments or cash) without providing a sound basis to compare the varying features and risks of these investments. 
  • Unclear and misleading explanations of how Crypto Assets work and their core features and risks. 
  • Failure to provide a sound basis to evaluate Crypto Assets by omitting clear explanations of how Crypto Assets are issued, held, transferred, or sold.  
  • Misrepresenting that the protections of the federal securities laws or FINRA rules applied to the Crypto Assets. 
  • Misleading statements about the extent to which certain Crypto Assets are protected by SIPC or under SIPA. 

Questions for Consideration

Statements or Claims

  • Do your firm’s Crypto Asset retail communications contain unwarranted or misleading content?  For example: 
    • descriptions of Crypto Assets as liquid assets that are easily tradable; 
    • language that overstates the safety of trading in Crypto Assets (e.g., stating or implying that Crypto Assets are “secured” by a trading platform, or “backed” by a clearing firm); or 
    • comparisons that misleadingly imply that Crypto Assets present similar or the same benefits as gold or cash alternatives. 
  • Do your firm’s statements concerning SIPC membership misleadingly state that SIPC protection applies with respect to Crypto Assets that are not securities under SIPA or are not held for the customer by the SIPC member?   
  • Do your firm’s communications concerning Crypto Assets misleadingly state or imply that Crypto Assets are offered through the broker-dealer (rather than through an affiliate or other third party)? 
  • When promoting Crypto Asset-related products such as funds that invest in Crypto Asset futures or funds that invest in businesses that may support Crypto Asset infrastructure, do your firm’s communications falsely imply that such products offer direct exposure to Crypto Assets?   
  • If your firm offers customers the ability to engage with both traditional securities (e.g., stock) and crypto asset-related products and services through a mobile app or online platform, does the app or platform clearly distinguish which entity offers each type of product or service?

Fair and Balanced Presentation

  • Do your firm’s retail communications concerning a Crypto Asset provide a fair and balanced presentation of its risks, such as: 
    • the speculative nature of the Crypto Asset (e.g., significant volatility, the potential for investors to lose the entire amount they invest); 
    • the lack of legal or regulatory protections (e.g., SIPC protections apply only to cash and securities held for an investor for certain purposes in a customer securities account at a SIPC-member broker-dealer and do not apply to Crypto Assets that do not qualify as SIPA “securities”); 
    • the extent to which the protections provided by transacting through a SEC-registered entity will apply; 
    • regulatory uncertainty concerning the Crypto Asset; and 
    • fraud risks that may be present?  
  • Do your firm’s retail communications concerning Crypto Assets clearly: 
    • state which products and services are offered specifically by the broker-dealer, and which are offered by an affiliate or other third party; 
    • state the nature and extent of exposure to Crypto Assets provided by crypto-related assets (e.g., mutual funds, futures contracts) offered through the firm (e.g., whether these investment vehicles provide indirect exposure to Crypto Assets and are not investing directly in Crypto Assets); 
    • explain commissions or fees incurred when trading in Crypto Assets; 
    • forthrightly disclaim SIPC protection where it would not apply; and  
    • prominently disclose that funds held at a SIPC-member broker-dealer other than in connection with the purchase or sale of SIPC-defined securities are not eligible for SIPC protection; that funds held with the intent to purchase Crypto Assets that do not qualify as SIPA “securities” are ineligible for protection; and that funds transferred from a SIPC-member broker-dealer account to a Crypto Asset platform are not eligible for SIPC protection? 
  • Are technical terms associated with Crypto Assets (e.g., blockchain, decentralized platform) adequately explained?

Additional Resources

1For purposes of this update, a crypto asset is an asset that is issued or transferred using distributed ledger or blockchain technology, including, but not limited to, so-called “virtual currencies,” “coins,” and “tokens.” A particular crypto asset may or may not meet the definition of a “security” under the federal securities laws. 

2Section 8 of Article 10 of the SIPC Bylaws states that an advertisement that references SIPC membership or protection might be misleading if the Securities Investor Protection Act (SIPA) “would not under most circumstances provide protection with respect to the investment or service advertised or if it might appear that SIPC protects or insures the quality of such investment or service.” See also 15 U.S.C. § 78kkk(d). Notably, an “investment contract” that is a “security” under other federal securities laws is not a “security” under SIPA unless it is the subject of a Securities Act registration statement. See 15 U.S.C. 78lll(14). SIPA also provides criminal penalties for false representations that a person or account is protected by SIPC where made with actual knowledge of their falsity and intent to deceive or cause injury.  See 15 U.S.C. § 78jjj(d)(1).