Got FOMO? Unregulated crypto firms have you just where they want you

Crypto companies are getting away with the kind of advertising and marketing that more traditional forms of financial products can’t | Federico Parra/AFP via Getty Images

Press play to listen to this article

Voiced by artificial intelligence.

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

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

Think that led to a pullback? Don’t you believe it. Despite the carnage, the Singapore-based company’s name was plastered all over billboards at December’s football World Cup in Qatar. After all, sports-loving, TV-watching armchair investors are target No. 1.

But there’s a problem: Crypto companies are getting away with the kind of advertising and marketing that more traditional forms of financial products can’t. The practise is largely unregulated, meaning firms who have mastered the art of appealing to basic emotions — the fear of missing out (FOMO in millennial-speak) or the temptation to try to get rich overnight — are having a field day.

So much so that the U.K.’s Financial Conduct Authority has put out 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’ve issued the number of warnings that we have to try to make retail investors aware of the fact that not everything that sounds great in an advert is necessarily great in reality,” EU securities regulator chief Verena Ross told POLITICO. “At the moment, the crypto assets are not necessarily financial products … so the advertising rules that you have for financial products do not 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 being able to market their services across the world — and be forced to add a long list of disclaimers.

Aside from sports events and TV ads, the marketing technique is also used on social media with the help of celebrity endorsements. Regulators worry that consumers take adverts at face value and are under the false impression safeguards are in place to protect them.

While some European countries have introduced new laws to tackle the problem, there are no rules on crypto advertising at EU level. The bloc’s regulatory tome for financial markets, MiFID II, in force since January 2018, is ill-suited to policing 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 service EU investors for the volatile market when the bloc’s crypto rulebook, MiCA, comes into force in 2024.

It’s not just a European problem. The U.S. Securities and Exchange Commission has come down hard on some celebrity endorsements, including that of billionaire socialite 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.

Crackdowns after the event grab headlines but policymakers across the world all face the same challenge of closing the loophole without restricting the legitimate rights of companies to manage their brand as well as servicing clients online from outside their borders.

Industry outcry

The problem has been thrown into sharper focus by the collapse of the 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 chief executive Sam Bankman-Fried an industry darling among lawmakers in Washington. He now faces a charge sheet that includes fraud and money laundering.

Some crypto companies are demanding EU regulators take action to prevent foreign companies from scooping up clients across the bloc through aggressive FOMO advertising, without registering their services.

“Either there’s a level playing field, or not,” said Eric Demuth, the chief executive 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 policymakers, who had come to view Bankman-Fried as the respectable face of crypto. The exchange had even managed to secure an investment license in Cyprus.

These companies are “buying their reputation by sponsoring sports teams, sports 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 name on sports venues and billboards.

FTX secured the naming rights for the Miami Heat’s basketball stadium in a deal worth $135 million, prior to its collapse. The company also hired U.S. comedian Larry David, star of the sitcom “Curb Your Enthusiasm,” for an advert that aired during the Super Bowl last year. The theme of the advert 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 onto the TV and smartphone screens of jocks and football fans across Europe — and the world — effectively leapfrogging the administrative burden of national licensing.

What makes things harder is that sports sponsorship is a ring-fenced agreement 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 holds the naming rights for the L.A. sports stadium that’s home to the Lakers, the Clippers and the National Hockey League’s Kings franchise.

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

A spokesman for Crypto.com declined to directly respond to Demuth’s comments. When asked whether the exchange had pursued a marketing strategy that circumvents local registration across Europe, he answered, “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 strive constantly to meet and surpass operating requirements in all of our markets.”

Scam artists

Because the EU has no hard and fast rules on how to govern crypto advertising, lawyers are often faced with questions from crypto companies over how to navigate the loophole. The main debate from a legal point of view is whether the companies fall foul of “reverse solicitation” rules.

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

This worked fine in the old world of dial telephones and financial brokers in pinstriped suits who could advise people on which foreign firms to approach. It was also obvious when a foreign company had launched an advertising campaign within a specific country and MiFID II is strict on reverse solicitation.

The problem now is that the internet and app economy have left those rules limp. MiFID II was proposed in 2011, only four years after the iPhone emerged, and completed in 2014, as app-driven businesses like Uber were taking off. These days, anyone with an iPhone can search for a celebrity-endorsed company and download the app.

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

EU officials expect the Commission to try to fix the problem for financial services in the spring when it unveils a legislative package that’s intended to help ordinary people put their savings into capital markets. As far as crypto goes, it won’t be until the MiCA rulebook comes into force next year that ESMA will be able to flex its muscles. Making the distinction between active advertising and brand management will be difficult, some lawyers warn.

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

“We may expect that branding could be considered as a form of advertising in certain cases, but further guidance needs to be provided on this question by ESMA to clarify which type of communication would be allowed,” he added. “ESMA is expected to adopt a strict interpretation.”

Hannah Brenton contributed reporting from Brussels.