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Navigating Crypto Asset Promotion Rules
Article by George Agathangelou, Senior Manager, Distributed Ledger Technology
After a long bear market crypto assets seem to regain popularity worldwide with Bitcoin’s price tapping $31,000 for a third time this year. While crypto-asset markets currently represent a tiny fragment of the global financial system in terms of size, they have grown significantly since the end of 2020. This surge in digital currencies, however, brings along substantial risks that are often inadequately disclosed to consumers, especially on social media platforms.
One of the challenges in the crypto space is the lack of adequate disclosure and regulation, particularly in terms of consumer protection. This issue is exacerbated on social media platforms, where there is a prevalence of misinformation, frauds, and misleading investment advice. Many social media platforms have policies in place to mitigate these risks, such as banning certain types of cryptocurrency-related advertisements or implementing measures to detect and remove fraudulent content. However, it remains a constant battle to stay ahead of bad actors who exploit the decentralized and unregulated nature of the crypto market. Regulators and authorities around the world are working to enhance consumer protection and establish clearer guidelines for cryptocurrency markets. These efforts aim to address the risks associated with cryptocurrencies, including price volatility, potential for fraud and frauds, lack of transparency, and market manipulation.
Initially, Meta (formerly Facebook) and Google banned the promotion of digital currencies in 2018 due to emerging threats associated with unregulated financial products. However, these platforms later relaxed their restrictions and reintroduced cryptoasset advertising with loose and perhaps inadequate pre-approval processes. Advertisers are required to apply for platform approval to market digital currencies, but there have been instances of misleading ads even when guidelines are followed. Platforms like Meta and Google have granted exemptions for certain types of crypto-related content, such as events, education, and news, which may present information that focuses on the benefits of digital currencies while potentially downplaying the associated risks.
In recent years, influencers, particularly those in the financial domain known as "finfluencers," have gained significant influence, especially among young people seeking investment opportunities. Many millennials and Gen Zers seek financial literacy and investment advice on platforms such as YouTube, TikTok, Instagram, and Facebook, often due to a lack of financial education in traditional schooling systems. These social media platforms have become popular avenues for obtaining financial information, and influencers provide content on various finance-related topics, including budgeting, financial management, and investment advice. Their content is often seen as easily accessible and understandable, making it an attractive alternative to traditional financial advice. Social media has the demonstrated the power to shape retail investors' behavior and can even contribute to phenomena like "Meme Stocks," where viral content can lead to significant fluctuations in stock prices. There have been cases where false statements made on platforms like Twitter have caused stock prices to crash or surge, affecting shareholders and market values, as seen in the case of GameStop Corp., where the bullish sentiments of individual investors fuelled by social media discussions led to a dramatic increase in the stock price. While social media platforms can enhance market transparency and efficiency through information sharing, they can also be used for disinformation and manipulation. This raises concerns about the integrity and stability of financial markets, requiring cooperation between financial authorities and other relevant entities to combat information operations.
Studies have also highlighted the significant influence that influencers, including finfluencers, have on consumers' decision-making and purchasing behavior. Influencers' ability to build brand awareness, establish a sense of affiliation and power, and create engaging content has made them effective in shaping consumer actions.
Regulators and authorities are increasingly concerned about the potential risks associated with inappropriate financial information provided by influencers on social media platforms. The rising popularity of social media "finfluencers" has attracted attention from regulators due to the potential impact such content can have on the financial well-being of followers who may make investment decisions based on influencer advice. Some areas of concern include the fitness and propriety of individuals providing advice, the factual accuracy of the information shared, and the financial well-being of followers.
Given the potential risks and impact of finfluencers on consumers, regulatory bodies, such as ASIC (Australian Securities and Investments Commission) in Australia, have taken steps to address the role of finfluencers in providing financial services. ASIC has issued guidelines and information sheets outlining the boundaries and responsibilities of finfluencers when discussing financial products and services online.
In March 2022, the UK regulators, specifically the Financial Conduct Authority (FCA) and the Advertising Standards Authority (ASA), issued warnings to social media influencers about the dangers of promoting "get-rich-quick schemes," including crypto assets and non-fungible tokens (NFTs). They collaborated on a campaign to prevent content creators from endorsing investment frauds and high-risk financial products. To assist influencers in making informed decisions and avoiding potential legal issues, the UK regulators also developed a checklist for influencers to review before accepting brand deals related to financial products and services. The checklist emphasizes that engaging in illegal financial promotion is a criminal offense that can result in a maximum prison sentence of two years and an unlimited fine. It serves as a reminder to influencers that they should approach licensed and reputable professionals when seeking financial advice.
Lastly, the FCA has published guidance on cryptoassets and implemented regulations to ensure that firms marketing crypto assets to UK consumers comply with the financial promotions' regime. The new regime applies to all firms marketing crypto assets to UK consumers, regardless of their location or the technology used for promotion. The FCA's approach includes creating a bespoke exemption for crypto asset businesses registered with the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. This exemption allows registered crypto asset businesses to communicate their own financial promotions to UK consumers, provided they meet certain criteria.
The European Supervisory Authorities (ESAs) in March 2022, emphasized that many crypto assets are highly speculative and risky, urging consumers to exercise caution and take informed decisions regarding their involvement with these assets. Moreover, in June 2023, the BEUC (European Consumer Organisation) and consumer authorities from eight European countries raised concerns about Instagram, YouTube, TikTok, and Twitter allowing misleading advertisements for crypto assets on their platforms. The BEUC submitted an external alert to the European network of national consumer authorities, the CPC-Network, and the European Commission under Article 27 of EU Regulation 2017/2394, known as the CPC Regulation. The alert highlighted a significant breach of consumer protection throughout the EU due to deceptive advertising of crypto asset products. The BEUC emphasized that these practices violated the guidelines of the EU Directive 2005/29/CE related to unfair business-to-consumer commercial practices, exposing consumers to potentially harmful and dishonest behaviours. By submitting the external alert, the BEUC and its member organizations aimed to draw attention to the issue and prompt regulatory action to address the misleading advertising practices on social media platforms.
The recent alert from the European Consumer Organisation (BEUC) highlights the issue of misleading advertisements for crypto assets on popular social media platforms and emphasizes the need for stronger consumer protection measures. While the upcoming EU regulation, Markets in Crypto Assets (MiCA), will require crypto asset providers to obtain a license for advertising within the EU, the BEUC argues that additional measures under existing consumer laws are necessary. This is because digital currency frauds present a significant risk of substantial financial losses for individuals. It should come as no surprise given the various warnings and rules currently governing the marketing of financial services under MiFIDII regulation. The BEUC calls for stricter advertising policies on crypto assets by online platforms, prevention of influencers from misleading consumers, and cooperation between European consumer authorities and supervisory authorities for financial services. The report also highlights that consumers are significantly exposed to the promotion of crypto by influencers on social media. These influencers often make misleading claims about the potential returns of investing in crypto, and they may not disclose that they are being paid to promote these products. The report also found that social media platforms are not doing enough to prevent this type of misleading advertising. And as a result, consumers are at risk of losing money by investing in crypto assets based on the false promises of influencers. The report additionally makes several recommendations to social media platforms and regulators, stating that social media platforms should be more transparent about the way they allow crypto-asset promotion on their platforms. Many influencers who promote crypto assets have little or no financial expertise, while the crypto market is highly volatile, and prices can fluctuate wildly on a daily basis. Regulators should also take steps to ensure that influencers are not making misleading claims about crypto assets. Consumers should be aware of the risks associated with investing in crypto-assets and should do their own research before making any investment decisions. The report concludes by stating that "the promotion of crypto assets on social media is a major cause for concern, and action is needed to protect consumers from harm."
Overall, while influencers, can play a valuable role in disseminating financial information and building awareness, there is a need for transparency, accuracy, and responsible conduct to protect consumers from potential financial harm. Regulators are increasingly focusing on ensuring appropriate standards and safeguards are in place when it comes to financial advice and recommendations provided by influencers on social media platforms. These regulatory initiatives are aimed at protecting consumers from fraudulent schemes and ensuring that influencers are aware of the legal and financial risks associated with promoting high-risk financial products and services. By collaborating with influencers and providing them with guidance, regulators seek to mitigate the potential harm caused to individuals who may be misled by misleading or unlawful financial promotions.
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Contact us with all your questions and concerns regarding the regulations surrounding the promotion of crypto assets. At Grant Thornton Cyprus, we have established a specialized business unit, to assist companies in exploring the vast opportunities presented by blockchain technology. Our team can assist you in assessing the impact that this nascent technology and its applications could potentially have on your organization
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References:
ResearchGate, ASIC, EIOPA(b), BEUC(a), Commission Europa, eur-lex europa(a), BEUC(b), eur-lex europa(b), ASA, FCA(a), FCA(b), ECB, EIOPA(b), Carnegie Endowment, ESMA, CNBC, ABC, Reuters