Do you have FOMO? Unregulated Crypto Firms Have You Exactly Where They Want You – POLITICO

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Expressed by artificial intelligence.

“Fortune smiles on the bold,” says movie star Matt Damon as the camera pans to a panoramic backdrop of Mars. But this is not an advertisement for space tourism. This is for crypto. And everyone buys it so why not you?

Like many other celebrity-studded ads, the actor’s “Bourne Identity” ad for Crypto.com hasn’t aged well. Just a month later, the market went into freefall, losing 70% of its value in June last year and seeing some massive companies in the process.

Do you think that led to a withdrawal? Don’t believe it. Despite the carnage, the Singapore-based company’s name was plastered all over the billboards during December’s FIFA World Cup in Qatar. After all, armchair investors who love sports and watch TV are the No. 1 target.

But there’s a problem: Crypto companies get away with the kind of advertising and marketing that more traditional forms of financial products can’t. The practice is largely unregulated, which means companies that have mastered the art of appealing to basic emotions – the fear of missing out (FOMO in millennial parlance) or the temptation to try to enrich overnight – have a field day.

So much so that the UK’s Financial Conduct Authority has published an online guide on how to “manage your FOMO”.

But that’s the problem. Currently, all regulators can do is talk tough.

No bite yet

“We have issued the number of warnings that we must try to make retail investors aware that not everything that sounds good in an advertisement is necessarily great in reality,” the head of the agency told POLITICO. EU Securities Regulator, Verena Ross. “Right now, crypto assets aren’t necessarily financial products…so the advertising rules you have for financial products don’t necessarily bite yet.”

Legal ambiguity makes it easy for crypto companies to lure customers outside the protective reach of national watchdogs. If they were regulated like more traditional services, they would face regulatory hurdles and red tape before they could market their services around the world – and would be forced to add a long list of disclaimers.

Apart from sporting events and TV commercials, the marketing technique is also used on social media with the help of celebrities. Regulators worry that consumers will take ads at face value and get the false impression that safeguards are in place to protect them.

While some European countries have introduced new laws to address the issue, there are no rules on crypto advertising at the EU level. The bloc’s regulatory tome for financial markets, MiFID II, in force since January 2018, is ill-suited to controlling online branding because it was written before the internet economy took off.

But things are changing. The European Securities and Markets Authority will soon begin developing guidelines on how foreign companies can serve EU investors for the volatile market when the bloc’s crypto regulation, MiCA, comes into force in 2024.

This is not just a European problem. The US Securities and Exchange Commission has harshly criticized some celebrity mentions, including that of billionaire socialite Kim Kardashian for her role in promoting a cryptocurrency called EthereumMax on Instagram before its value crashed . Kardashian settled the federal charges by paying the SEC $1.26 million.

Crackdowns after the event grab headlines, but policymakers around the world all face the same challenge of closing the loophole without restricting businesses’ legitimate rights to manage their brand as well as serve customers online from outside their borders.

Industry outcry

The problem was highlighted by the collapse of crypto firm FTX.

Based in the Bahamas and valued at $32 billion this time last year, FTX was the world’s third-largest exchange with chief executive Sam Bankman-Fried, an industry darling among Washington lawmakers. He now faces an indictment that includes fraud and money laundering.

Some crypto firms are demanding that EU regulators take action to prevent foreign companies from picking up customers across the block through aggressive FOMO advertising, without registering their services.

“Either the playing field is level playing field or it’s not,” said Eric Demuth, managing director of Austrian crypto and securities exchange Bitpanda, which prides itself on operating only in countries that have granted it a license. “They should act now, proactively…before another FTX happens and hits many more retail customers.”

The collapse of FTX shocked policymakers, who had come to regard Bankman-Fried as the respectable face of crypto. The exchange had even managed to obtain an investment license in Cyprus.

These companies “buy their reputation by sponsoring sports teams, sporting events, celebrities,” Demuth said.

Sports advertising is no accident. Research shows that the people most likely to invest in cryptocurrencies are sports fans and crypto companies have been more than happy to spend hundreds of millions of dollars to get their names on sports sites and display panels.

FTX secured the naming rights to the Miami Heat basketball stadium in a deal worth $135 million, before it collapsed. The company also hired American comedian Larry David, star of the sitcom “Curb Your Enthusiasm,” for a commercial that aired during the Super Bowl last year. The theme of the ad was David’s habit of rejecting revolutionary inventions.

Demuth’s concern is that companies like Crypto.com are using sports sponsorship to get their names on the TV and smartphone screens of sportspeople and football fans across Europe – and the world – effectively avoiding the administrative burden of national licenses.

What makes it more difficult is that sports sponsorship is a bounded deal with an event organizer rather than a specific country. Crypto.com also has a major sponsorship deal with mixed martial arts company Ultimate Fighting Championship and owns the naming rights to the Los Angeles Sports Stadium which is home to the National Hockey League’s Lakers, Clippers and Kings franchise. .

In Europe, Crypto.com is registered in the UK, France, Italy, Greece and Cyprus. The company also holds two licenses in Malta which enable payments and management of virtual financial assets. MiCA will allow crypto companies to operate across the block once they obtain an operating license. Until then, they must apply in each country before settling there.

A spokesperson for Crypto.com declined to directly respond to Demuth’s comments. When asked if the exchange has pursued a marketing strategy that bypasses local registration across Europe, he replied “No”.

“Crypto.com is trusted by more than 80 million customers worldwide and is the industry leader in regulatory compliance, security and privacy certifications,” the spokesperson said in an email response. . “We constantly strive to meet and exceed operating requirements in all of our markets.”

Scammers

Because the EU does not have strict rules on how to govern crypto advertising, lawyers are often faced with questions from crypto companies about how to navigate the loophole. The main debate from a legal point of view is whether companies violate the rules of “reverse solicitation”.

This is when people go out of their way to solicit the services of a company based and regulated outside their borders. There’s nothing wrong with that in principle, thinking that people should be free to decide how they spend their money, and if they believe foreign services can get them a better deal, that’s their prerogative .

However, EU regulators are drawing a line if a foreign company actively markets its products and services across the bloc without adopting local safeguards that protect EU citizens from scammers.

It worked well in the old world of rotary telephones and financial brokers in pinstriped suits who could advise people on foreign companies to approach. This was also evident when a foreign company launched an advertising campaign in a specific country and MiFID II is strict on reverse solicitation.

The problem now is that the internet and app economy has left these rules soft. MiFID II was proposed in 2011, just four years after the emergence of the iPhone, and completed in 2014 as app-focused companies like Uber took off. Nowadays, anyone with an iPhone can search for a celebrity-endorsed company and download the app.

There are no rules on crypto advertising at the EU level l Oatawa/iStock via Getty Images

EU officials expect the Commission to try to tackle the financial services problem in the spring when it unveils a legislative package intended to help ordinary people put their savings in capital markets. When it comes to crypto, it’s not until the MiCA rulebook comes into effect next year that ESMA will be able to flex its muscles. Distinguishing between active advertising and brand management will be difficult, some lawyers warn.

“THE [MiCA] The proposal does not define these terms, so currently leaves some room for interpretation,” said Nicolas Kalokyris, a partner in the financial services and fintech department at law firm DLA Piper, who regularly advises financial firms. on cryptography issues.

“We can expect that branding could be considered a form of advertising in some cases, but further guidance needs to be provided on this issue by ESMA to clarify what type of communication would be allowed,” he added. “ESMA should adopt a strict interpretation.”

Hannah Brenton contributed reporting from Brussels.

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