“Crypto” or “digital assets” are now very much a part of the mainstream discussion, as interest in crypto has grown even for individual (retail) investors. The question is, are investors prepared, and further, can they rely on what they hear from their financial advisers?
First, let’s review what regulators found in examinations of brokerage firms over the last 15 months. Then, let’s talk about new Bitcoin
BTC
Earlier this month, FINRA published “FINRA Provides Update on Targeted Exam: Crypto Asset Communications,” reviewing targeted brokerage firm examinations that began more than a year ago (November 2022). What they found is noteworthy – and cause for investors to approach crypto with caution.
In reviewing over 500 Crypto Asset-related retail communications, FINRA “identified potential substantive violations” of its communications rule (FINRA Rule 2210) 70 percent of the time.
This is what they found. If you are curious about, or buying, crypto, take note.
- “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”
And, even, “[M]isrepresenting that the protections of the federal securities laws or FINRA rules applied to the Crypto Assets”; as well as “Misleading statements about the extent to which certain Crypto Assets are protected by SIPC or under SIPA.” (The abbreviations refer to the Securities Investor Protection Corporation and the Securities Investor Protection Act.)
Crypto Pyramid Schemes
When something like crypto catches one’s attention, don’t be surprised if you notice bad actors entering into the picture. A few days ago (January 29, 2024), the SEC filed a complaint against crypto Ponzi schemers. The defendants were alleged to engage in a “global, crypto asset-related, multi-level marketing pyramid and Ponzi scheme that raised over $1.7 billion from victims worldwide, including millions from U.S. investors.” The result? One defendant settled; the other defendant will litigate.
New Bitcoin ETFs
The SEC approved several bitcoin ETFs just a few weeks ago (January 10, 2024): Grayscale Bitcoin Trust; the Bitwise Bitcoin ETF; the Hashdex Bitcoin ETF; the iShares Bitcoin Trust; the Valkyrie Bitcoin Fund; the ARK 21 Shares Bitcoin ETF; the Invesco Galaxy Bitcoin ETF; the VanEck Bitcoin Trust; the WisdomTree Bitcoin Fund; the Fidelity Wise Origin Bitcoin Fund; and the Franklin Bitcoin ETF, as reported in Foley’s SEC Greenlights Bitcoin ETFs: What Happened and What It Portends (January 11, 2024).
How should investors look at crypto ETFs? The ETF is a security, offered by prospectus, regulated by the SEC, and traded as an equity. Moreover, the SEC’s approval of BTC ETFs is “historic,” no doubt. As pointed out by the Foley post, “it has been sought by so many for so long and because the potential market for BTC ETFs is multiple trillions of dollars.”
‘Better’ for Investors?
As Jay Jacobs, iShares Head of Thematics and Alternative ETFs for Blackrock, said recently, “You might have noticed Bitcoin make its way into our everyday lives, from Bitcoin ATMs to various merchants accepting Bitcoin as payment, further driving interest in what the future holds for the cryptocurrency.”
It’s hard to deny the “significant acceleration” of public interest in crypto. Interest for the average investor in Bitcoin ETFs needs to be tested. What about retirees? My view: wait.
Resources
To learn more about digital assets, Franklin Templeton offers a number of resources: “Franklin Templeton Digital Assets,” “De-crypting Bitcoin” and “Glossary.” The Franklin Bitcoin ETF (EZBC) is described here.
Also read “Crypto Assets” and listen to Ira Gluck’s podcast for more insight on FINRA’s findings. Gluck is Senior Director, Advertising Regulation Department, FINRA. As interest in crypto increases, so does the potential harm caused by problematic communications.
Questions
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