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“Fortune favors the brave,” says film star Matt Damon as the camera pans to a scenic backdrop of Mars. But this is not an advertisement for space tourism. It’s for crypto. And everyone else is buying some, so why not you?
Like many other celebrity-studded ads, the “Bourne Identity” actor’s commercial for Crypto.com hasn’t aged well. Barely a month later, the market went into freefall, losing 70 percent of its value by June of last year and wiping out some large companies in the process.
Do you think this caused a pullback? Do not you believe it. Despite the carnage, the Singapore-based company’s name was all over the billboards at December’s World Cup in Qatar. After all, sports-loving recliner investors are target #1.
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, meaning companies that master the art of appealing to basic emotions — the fear of missing out (FOMO in millennial lingo) or the temptation to get rich overnight — have a big day have.
So much so that the UK Financial Conduct Authority has released an online guide to “Managing Your FOMO”.
But that’s the problem. For now, regulators can only talk hard.
No bite yet
“We’ve issued the number of warnings we need to try to make retail investors aware that not everything that sounds great in an ad is actually great,” EU Securities and Exchange Commission chief Verena Ross said. to POLITICO. “Right now, the crypto assets aren’t 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 out of 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 globally — and be forced to add a long list of disclaimers.
Besides sporting events and TV commercials, the marketing technique is also used on social media with the help of celebrities. Regulators fear consumers will take advertising at face value and give 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 governing crypto advertising at the EU level. The bloc’s financial markets regulatory body, MiFID II, in force since January 2018, is unsuitable for monitoring online branding as 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 rulebook, MiCA, comes into effect in 2024.
It’s not just a European problem. The U.S. Securities and Exchange Commission has hit some celebrity endorsements hard, including billionaire Kim Kardashian for her role in promoting a cryptocurrency called EthereumMax on Instagram before its value plummeted. Kardashian settled the federal charges by paying the SEC $1.26 million.
Post-event raids grab the headlines, but policymakers around the world all face the same challenge of closing the gap without restricting businesses’ legitimate rights to manage their brand and serve customers online from outside their borders.
industry outcry
The issue has been brought into greater focus by the collapse of crypto firm FTX.
Bahamas-based FTX, valued at $32 billion this time last year, was the third-largest exchange in the world, with CEO Sam Bankman-Fried being an industry darling among lawmakers in Washington. He now faces charges involving fraud and money laundering.
Some crypto companies are demanding that EU regulators take action to prevent foreign companies from aggressively FOMO advertising attracting customers across the block without registering their services.
“Either a level playing field or 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. “You should act proactively now… before another FTX happens and hits many more retail clients.”
The collapse of FTX shocked policymakers who saw Bankman-Fried as the respectable face of crypto. The exchange even managed to secure an investment license in Cyprus.
These companies “buy their reputation by sponsoring sports teams, sporting events and celebrities,” Demuth said.
Sports advertising is no coincidence. 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 to the Miami Heat’s basketball stadium in a $135 million deal prior to its collapse. The company also hired US comedian Larry David, star of the sitcom Curb Your Enthusiasm, for a commercial that aired during last year’s Super Bowl. The subject of the ad was David’s habit of rejecting breakthrough inventions.
Demuth’s concern is that companies like Crypto.com are using sports sponsorships to get their name onto the television and smartphone screens of athletes and football fans across Europe — and the world — effectively skipping the administrative burden of national licensing.
To make matters worse, sports sponsorship is a earmarked agreement with a promoter and not with a specific country. Crypto.com also has a major sponsorship deal with Ultimate Fighting Championship, a mixed martial arts company, and holds the naming rights to the LA athletic stadium that is home to the Lakers, the 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, allowing payments and managing 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 opening a business there.
A Crypto.com spokesperson declined to respond directly to Demuth’s comments. When asked if the exchange had pursued a marketing strategy that bypassed local registration across Europe, he replied “no.”
“Trusted by more than 80 million customers worldwide, Crypto.com is the industry leader in regulatory compliance, security and privacy certifications,” the spokesperson said in an emailed response. “We continually strive to meet and exceed operational requirements in all of our markets.”
cheater
Since the EU has no hard and fast rules regulating crypto advertising, lawyers are often faced with questions from crypto companies about how to navigate the gap. From a legal point of view, the main debate is whether the companies violate the reverse solicitation rules.
This is when people go out of their way to seek the services of a company that is based and regulated outside its borders. There is nothing wrong with that, in principle, if you think that people should be free to choose how they spend their money and if they think foreign services can give them a better deal, then that’s their prerogative.
However, EU regulators draw a line when a foreign company is actively marketing its products and services across the bloc without local safeguards in place to protect European citizens from scammers.
This worked well in the old world of dial-up phones and financial brokers in pinstripe suits who could advise people on which foreign firms to contact. It was also evident when a foreign company had launched an advertising campaign in a particular country and MiFID II is strictly on reverse solicitation.
The problem now is that the internet and app economy has made these rules obsolete. MiFID II was proposed in 2011, just four years after the iPhone launched, and finalized in 2014 when app-driven companies like Uber were on the rise. These days anyone with an iPhone can search for a celebrity endorsed company and download the app.
There are no rules for crypto advertising at the EU level l Oatawa/iStock via Getty Images
EU officials expect the Commission to try to solve the financial services problem in the spring when it unveils a package of laws to help citizens invest their savings in capital markets. As for crypto, ESMA will not be able to flex its muscles until the MiCA rulebook comes into effect next year. Some lawyers warn that the distinction between active advertising and brand management is becoming difficult.
“The [MiCA] The proposal does not define these terms, which therefore leaves some room for interpretation at this time,” said Nicolas Kalokyris, an associate in the financial services and fintech practice of the law firm DLA Piper, which regularly advises financial firms on crypto-related issues.
“We can expect that branding could in certain cases be considered a form of advertising, but further guidance on this issue needs to be provided by ESMA to clarify what type of communication would be allowed,” he added. “ESMA is expected to adopt a strict interpretation.”
Hannah Brenton contributed reporting from Brussels.
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