Authors: Sachin Dubey & Sukriti Gupta
Third- year Law students at National Law University, Odisha
I. Introduction
Recently, Securities and Exchange Board of India (“SEBI”) approved a proposal to prohibit entities under its regulation from associating with unregistered “finfluencers”. Financial influencers, often referred to as “finfluencers”, are individuals who provide guidance on various financial products such as securities investments, personal finance management, banking products, etc. through their social media channels. In recent years, finfluencers have come under heavy criticism for misleading and taking advantage of unsuspecting investors and traders. While SEBI’s decision to eliminate unregistered finfluencers will apply to the securities market, which falls under its regulatory oversight, the unregulated crypto market remains a wild frontier where crypto finfluencers continue to operate unchecked.
Crypto finfluencers, leveraging their popularity or status, influence the decision of investors to invest in particular cryptocurrency through promotions or recommendations on social media platforms. As cryptocurrency has gained widespread attention over the past few years, the influence and visibility of crypto finfluencers have also grown significantly. Many of them lack the qualifications to offer advice and recommendations, and their failure to conduct proper due diligence before recommending particular crypto product results in investors losing their money.
Since cryptocurrency remain unregulated by SEBI or RBI including as an option for investment, the deceptive conduct of crypto finfluencers raises concern regarding safety and security of investors in the market.
This paper discusses how crypto finfluencers engage in misleading and exploitative practices that jeopardize investors, emphasizing the need stronger regulations and supervision to address these issues.
II. From Hype to Harm: The Misleading Role of Crypto Finfluencers
Crypto finfluencers along with celebrities with their massive following on social media platforms use it as channel to promote cryptocurrencies. Influencers in collaboration with a particular crypto product promote it on social media platforms to hike its prices and when the price of it rises, the owner as well as influencers sell their own holdings leading to the fall in price of crypto which will consequently leave nothing in the hands of innocent investors. Celebrities frequently promote cryptocurrency products without proper due diligence, potentially leaving investors in a challenging situation. For example, in October 2021, CoinSwitch Kuber, a cryptocurrency exchange, enlisted Ranveer Singh as its brand ambassador to appeal to Gen Z and millennial investors.
In July 2022, crypto finfluencers in India drew major criticism due to Vauld Crisis. Vauld, a Singapore-based crypto exchange, suspended operations due to volatile market conditions and financial troubles with its business partners. This decision has left 800,000 investors uncertain about the recovery of their funds. It was reported that most of the Indian investors in Vauld were students and young individuals, who were influenced by content creators and financial influencers to invest in the platform. Influencers like P.R. Sundar, Ankur Warikoo, Akshat Shrivastava, and Anish Singh Thakur, who operate the Booming Bulls channel, were often mentioned for their reckless promotion of Vauld. These influencers were criticized for irresponsibly endorsing the platform, which influenced many young investors.
Not just in India but in other countries such as USA, celebrity influencers like Kim Kardashian and Floyd Mayweather have earned millions by endorsing specific, often questionable, crypto investments and encouraged fans to purchase obscure coins that rapidly lost value and promoted little-known collections of non -fungible tokens (“NFTs”), which are unique digital files. The Securities and Exchange Commission (“SEC”) imposed hefty fines on them for violating SEC disclosure rules for endorsements..
III. Impact of Advertising Standards Council of India’s (“ASCI”) Guidelines on Crypto Advertising Practices
On February 23, 2022, ASCI issued its ‘Guidelines for advertising of Virtual Digital Assets and linked services’ to prevent misleading advertisements related to ‘crypto products’ and NFTs. The guidelines aim to ensure that consumers engaging with Virtual Digital Assets (“VDA”) are fully informed about the associated risks. It was brought in the light of increasing advertisements touting the advantages of investing in cryptocurrency, promoting them as a foolproof method to earn substantial returns, potentially lakhs or even crores, in a very short time.
The guidelines require that all advertisements for VDA products and exchanges must prominently display the following disclaimer in a way that cannot be overlooked: “Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions.” Further, it laid down detailed set of rules concerning how the aforesaid disclaimer should be presented in each advertisement format including print, audio, video, social media posts. It also imposed prohibitions on comparison of VDAs with other regulated asset classes, understating the related risks, promising or guaranteeing future profit increases, depicting VDA products as remedies for financial or personal problems, etc.
Further, an advertisement will not receive relevant certification to telecast if they do not comply with the ASCI VD Guidelines. As per the guidelines, advertisers and media owners must also ensure that all earlier advertisements must not appear in the public domain unless they comply with the guidelines, post 15th April 2022.
Largely, the purpose was to protect consumers from being enticed by cleverly crafted advertisements and subsequently losing money in one of the most volatile and unregulated markets.
However, as ASCI is a self-regulatory and voluntary organization without statutory authority, its guidelines did not find sufficient enforcement in the market. According to data released by ASCI, influencers were responsible for over 92% of crypto-related advertisement violations in India between January 2022 and May 2022, rather than celebrities. In such cases, ASCI cannot do anything but to inform the influencer about the violation of guidelines. It lacks the authority to impose fines on influencers or celebrities for violating ad guidelines and ban them from participating in advertisements.
Therefore, the investors interest gets highly jeopardized demanding effective enforcement of these guidelines.
IV. Foreign Regulatory Trends on Crypto Finfluencers
Globally, with an incremental trend of usage of cryptocurrencies, there has been many concerns regarding the upsurge of crypto finfluencers. Therefore, various countries have propounded several rules and regulations to keep a strict check on these influencers promoting cryptocurrencies.
Like in Spain, only those influencers with at least 100,000 followers can advertise cryptocurrencies by notifying National Securities Market Commission (“CNMV”) at least 10 days prior to the promotion. By setting this minimum threshold, it might ensure that only those influencers with maximum number of reach and presumed responsibility are authorised to advertise or promote cryptocurrencies. India should also set its own altered threshold limit keeping in mind the number of influencers and users acquaintance with crypto market. India also needs to have such rules where the influencers have to notify an authoritative body, like ASCI about their promotional content to provide a pre-check to ensure that it follows the regulatory standards and would also pluck any misleading or distorted information being promoted.
The Financial Conduct Authority (“FCA”) of the United Kingdom (‘U.K.’), firstly, brought the crypto sector under its guidelines for promotions of financial instruments on social media, which states that memes which relates to misinformation of cryptocurrencies will be subject to these financial promotion guidelines and hence, will be scrutinised. Also, the crypto firms need to get themselves registered with FCA for getting their ads approved and all such promotions should also include risks and warnings associated with. India should also make it mandatory for these firms and finfluencers to register with SEBI to make sure that the promotional information is vetted and credible enough for promotion.
Apart from this, these firms and finfluencers of U.K., has provided its first-time investors with 24 hour “cooling off” time period, in which they can cancel or withdraw from their purchase of crypto without suffering any penalty. Like U.K., India should also introduce “cooling off” period in all crypto transactions. The government along with bodies like SEBI or RBI can have awareness programmes regarding educating the public on the benefits of using cooling off period and the how to use this period efficaciously.
The Federal Trade Commission (“FTC”) of United States of America (‘U.S’) has also propounded several guidelines that relates to clear disclosure of any “material connection” with the promotion, including the consideration amount being paid to these influencer for the same. Along with FTC, the US Securities and Exchange Commission (“SEC”) has announced penalties for finfluencers for promoting manipulative crypto information. Having knowledge that they are entitled bound to face legal penalties for their deceptive information, they are more likely to be bound to promote legitimate and ethical promotions.
Further, India can also institute a certification process which can include tutoring about legitimate promotion strategies, regulatory compliances, and risks and penalties associated with unethical promotion or advertisement of cryptocurrencies. Also, certain guidelines should be formulated for social media platforms, specifying the content and nature of the promotion and advertisement, to be allowed to be shown up on such platforms.
V. Conclusion
Rising influence of crypto finfluencers over investors, especially retail investors by creating hype around cryptocurrencies without revealing financial ties with crypto entrepreneurs is seriously affecting the interest of investors in the market. It is not that India has not tried its hand to bring regulation on crypto finfluencers. ASCI has already laid down the same, however being a self-regulatory organisation, it cannot enforce its guidelines. Therefore, it becomes imperative for India to take cue from foreign framework to control the influence of crypto finfluencers in order to safeguard investor’s interests.
Note: This article has been reviewed by Mr. Anish Jaipuriar (Partner, Merger & Acquisition/Tech Law, Burgeon Law) at the Tier II Stage.