Do you have FOMO? Unregulated crypto firms have you right where they want you – POLITICO

“Fortune favors the brave,” says the film’s star Matt Damon as the camera pans to a scenic backdrop of Mars. But this is no advertisement for space tourism. It’s for crypto. And everyone else buys some, so why don’t you?

Like many celebrity-studded ads, the “Bourne Identity” actor’s commercial for Crypto.com didn’t get old. Barely a month later, the market went into freefall, losing 70 percent of its value by June of last year and seeing some massive companies in the process.

Do you think that led to a retreat? Don’t you think so. Despite the carnage, the Singapore-based company’s name was plastered across billboards during December’s World Cup in Qatar. After all, sports-loving, TV-watching armchair investors 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 firms 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 get rich overnight — are having 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 is the problem. At the moment, all regulators can do is talk tough.

No bite yet

“We have issued the number of warnings that we have to try to make retail investors aware of the fact that not everything that sounds good in an advertisement is necessarily good in reality,” the EU’s securities regulator, Verena Ross, told POLITICO. “At the moment, cryptoassets are not necessarily financial products … so the advertising rules you have for financial products don’t necessarily bite yet.”

The legal ambiguity makes it easy for crypto companies to lure clients away from 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 worldwide – and be forced to add a long list of disclaimers.

Apart from sporting events and TV ads, the marketing technique is also used on social media using celebrity endorsements. Regulators worry that consumers take advertising at face value and are under the false impression that safeguards are in place to protect them.

While some European countries have introduced new laws to tackle the problem, there are no EU-level rules for crypto advertising. The bloc’s regulatory theme for financial markets, MiFID II, which has been 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 for how foreign companies can serve EU investors for the volatile market when the bloc’s crypto rulebook, MiCA, comes into force in 2024.

It is not just a European problem. The US Securities and Exchange Commission has come down hard on some celebrity endorsements, including that of billionaire Kim Kardashian for her part in promoting a cryptocurrency called EthereumMax on Instagram before its value crashed. Kardashian settled the federal charges by paying the SEC $1.26 million.

Post-incident measures grab headlines, but policymakers around the world face the same challenge of closing the loophole without curtailing the legitimate rights of companies to manage their brand, as well as serve customers online beyond their borders.

Industry fast

The problem has been brought into sharper focus by the collapse of crypto firm FTX.

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

Some crypto companies are calling for EU regulators to take action to prevent foreign companies from acquiring customers across the bloc through aggressive FOMO advertising, without registering their services.

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

The FTX collapse shocked politicians, who had come to see Bankman-Fried as the respectable face of crypto. The exchange had even managed to secure 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 are more than happy to spend hundreds of millions of dollars to get their name on sports arenas and billboards.

FTX secured the naming rights to the Miami Heat’s 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 an ad that aired during the Super Bowl last year. The theme of the ad was David’s habit of dismissing groundbreaking inventions.

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

What makes things more difficult is that sports sponsorship is a limited agreement with an event organizer rather than a specific country. Crypto.com also has a major sponsorship deal with the mixed martial arts company Ultimate Fighting Championship and has the naming rights to the LA sports stadium that is home to the Lakers, Clippers and the National Hockey League’s Kings franchise.

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

A spokesman for Crypto.com declined to respond directly to Demuth’s comments. Asked if the exchange had followed 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 emailed response. “We constantly strive to meet and exceed operational requirements in all our markets.”

Scammers

Because the EU has no hard and fast 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 the companies are in breach of “reverse solicitation” rules.

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

However, EU regulators draw the line if a foreign firm actively markets its products and services across the bloc without adopting local safeguards that protect European citizens from fraudsters.

This worked fine in the old world of telephones and pin-striped finance brokers who could advise people on which foreign firms to approach. It was also obvious when a foreign company had 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 relaxed these rules. MiFID II was proposed in 2011, just four years after the iPhone appeared, and was completed in 2014, when app-driven businesses like Uber took off. These days, anyone with an iPhone can search for a celebrity-endorsed company and download the app.

EU officials expect the commission to try to fix the problem for financial services in the spring when it unveils a package of laws intended to help ordinary people put their savings into capital markets. In the case of crypto, it will not be until the MiCA rulebook comes into effect next year that ESMA will be able to flex its muscles. It will be difficult to distinguish between active advertising and brand management, some lawyers warn.

“The [MiCA] the proposal does not define these terms, which therefore currently leaves room for interpretation, says Nicolas Kalokyris, an associate in the financial services and fintech department of the law firm DLA Piper, who regularly advises financial companies on crypto-related issues.

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

Hannah Brenton contributed reporting from Brussels.