Crypto Enters Crypt Of Horrors – How Can Firms and FAs Protect Themselves?  

Last Year, I Sounded the Alarm: And All I Got Was ‘Crypto Bro’ Hate Mail 

Sander Ressler, Expert Columnist, Compliance & Regulatory Affairs, WSR

Like many compliance supervision professionals, I’ve frequently wished for a time machine – Preferably, a flying DeLorean, because you might as well travel in style. 

If we’re going to go back in time let’s do it in style

Not for myself, mind you.  For the people I try to protect from financial, legal, and regulatory woes when exotic and speculative investment products blow up spectacularly, leaving wealth management firms and their financial advisors holding the bag. 

Crypto assets were very high on my list of assets apt to do just that, as noted in my not very subtly headlined column from November 2021, “The Crypto Craze Could Murder Financial Advisors Careers.” 

At the time, I received more hate mail from the ‘crypto bro’ crowd than I could shake the proverbial stick at, as noted in my December 2021 column, “Every Financial Advisor’s Worst Crypto Nightmare.”

Where Are We Now? 

Well, let’s see where things are today:  According to recent coverage from the Atlantic, as much as $200 billion in value has been erased in the crypto market in just several days or so. 

A recent minor recovery for major cryptocurrencies notwithstanding, Bitcoin, the darling of cryptocurrencies, is down about 50% from its high watermark.   

Even Bitcoin has fallen

Meanwhile, many NFT transactions are increasingly under fire by regulators as being potentially self-dealing, with questions by experts about the true value of NFT assets multiplying rapidly. 

And of course, stablecoins, lauded as the next evolutionary step up from traditional fiat currencies like that silly high-risk U.S. dollar, are collapsing everywhere. 

It’s a sign of the times when Reddit boards dedicated to discussions of TerraUSD and Luna offer information about suicide help hotlines to its deeply distressed investors according to a recent story from Fortune

What’s Next for Crypto? 

You can church up any speculative asset in the sheep’s clothing of technology, innovation, and disruption, but at the end of the day, an investment bubble is just that. 

Do all bubbles burst in time?

History tells us that 99% of investment bubbles built on the back of incredible claims and irrational prices fail, with FOMO investors taking it on the chin. 

So let’s address the usual strawman question that crypto bros like to toss my way:  Do I believe that the entire crypto asset class is doomed

Obviously not.  But as with the dot com bust, we’re going to see a great deal of garbage get flushed down the toilet before the fundamentally sound assets are left standing. 

And yes, a small percentage of truly sound digital assets will survive and contribute to the economies of the world over the long run.  Recently, a certain bald Shark Tanker stated his belief that digital assets will eventually be the 12th sector in the S&P 500.   

For the record, I think he’s probably right.  But if the number of cryptocurrencies in existence today is over 10,000, how many survive?  Maybe 100 survive?  Or 50?

These aren’t numbers that should be reassuring to folks who have bet the farm on a continued and broad-based rise in value across the crypto space!

Top Three Steps for Firms and FAs to Protect Themselves

Without question, much of the crypto space is very apparently a speculative bubble, and that bubble is now deflating right in front of us.

And it is during moments like these when the plaintiff’s bar and regulators will appear on the scene, ready to do some serious finger-pointing. 

What should wealth management firms and financial advisors who have been aligning clients with crypto strategies and products do to protect themselves? 

First, slow your roll with offering new crypto products, especially from unproven firms hyping up trivial developments

Slow and steady as they say…

Case in point:  When the crypto markets already were shaky in the closing days of last month – with heightened chatter about the risks of stablecoins in particular – crypto firm Stablecorp, which claims to be focused on “Digital Dollar Receipts” for the Canadian dollar, issued a press release announcing the receipt of a whopping $1.5 million investment.   

The press release was a marvel of bombast, with three separate quotes and multiple headlines, all written up as if an investment in the company that is less in amount than a nice condo in Miami was the best thing since the wheel – Here’s to driving up more FOMO among investors (looking at you, Larry David)!

For wealth management firms, it will be important to avoid engaging with crypto firms that seem to have a track record for excessive self-promotion.

Next, start the process for bringing aboard outside expertise to scale up on crypto regulatory oversight.

According to Mitch Avnet, Founder and Managing Partner of Compliance Risk Concepts (CRC), a national consultancy, bringing aboard outside expertise are especially important for the crypto marketplace, given its rapid evolution and lack of regulatory clarity.

Mitch Avnet, Founder & Managing Partner, Compliance Risk Concepts

“As the digital asset market evolves, it is not only becoming more complex but also more accessible. Seeking efficient, focused assistance in this area on a consultancy basis provides the benefit of digital currency expertise at a time of volatility and uncertainty, versus an internal hire which may not prove to be a constant necessity.”

Avnet notes that wealth management firms seeking a third-party compliance firm should look at the size, scale, and available resources of prospective providers, avoiding consultancies that lack specific industry expertise and prioritizing partnerships with firms whose professionals have experience as in-house compliance personnel.

Avnet added, “Carefully consider exactly what you want to accomplish and ensure this is clearly outlined in the terms of the engagement. Due to the volatility and rapid evolution of the digital currency market, consider asking to add a clause whereby you can keep the firm on retainer following the conclusion of the initial engagement. This will prove helpful as new industry or regulatory developments or best practices emerge.”

Finally, triple-check your digital communications content capture, archiving, and e-discovery capabilities.

By way of emphasis on this point, Robert Cruz, Vice President of Information Governance at regtech firm Smarsh, notes that wealth management businesses should pay close attention to recent public statements made at the latest FINRA annual conference by SEC Chairman Gary Gensler.

Robert Cruz, Vice President of Information Governance, Smarsh

Gensler, who referred to the asset class as “highly speculative,” likened how the SEC under his leadership will approach crypto regulatory scrutiny in the same way police officers patrol their beats.

For wealth management firms, according to Cruz, the message is obvious.  “Go in with your eyes wide open and be prepared to defend the actions of your business to protect the interest of investors.”

This means firms and financial advisors should take extra care to ensure they are adhering to existing regulatory requirements regarding advertising, communications with the public, as well as record keeping, and supervisory obligations.

Cruz said, “The best defense to address the intrinsic volatility of this market is to take proactive steps to capture, store and supervise communications that surround crypto investments to show that you are accurately communicating to investors the risks involved.”

Get Real, Real Fast 

Even now, if you look at social media, you will continue to see “influencers” tout the new digital age.  Numerous kids barely old enough to shave are proudly proclaiming Bitcoin will shake off its latest troubles and go to $1,000,000. 

It’s time to turn off podcasts of pretend boxers and 20-something influencers spouting about the millions they make trading crypto punks.  I am tired of watching Gary Vee, Grant Cardone, the Paul brothers, and other “content creators” jam social media with investment stories they think make them look cool – When, in actuality, it all just makes them look like fools.   

Financial advisors and wealth management firms who have been hearing incessantly from the cool kids about how “if you can’t get your clients into crypto in a big way soon, your business is dead” can hopefully use the latest crypto meltdown to level set with their crypto-happy clients. 

When I invest, I am going to do what smart people have done since the dawn of time: Look at the facts, follow the smart people and diversify in high quality, time-tested assets.   

Invest in assets that stand the test of time

Maybe I won’t be part of the cool crowd but I will be financially just fine – And if you’re in the business of helping financial advisors and their clients, you can’t do better than that. 

Unless, of course, you own a nifty time-traveling DeLorean. 

Sander Ressler, WSR’s Expert Columnist, Compliance & Regulatory Affairs, can be reached via ContributingEd@wealthsolutionsreport.com 


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