Advertising regime for crypto-assets and other investment tools

RDL 5/2021 on extraordinary measures to support business solvency in response to the Covid-19 pandemic amended the LMV so that the CNMV can subject to authorization the advertising of investment in crypto-assets.

Thus, the system extends the supervising, inspecting and sanctioning powers covering an area previously unregulated. This article will focus on the regulatory change and the consequences of this new system.

The supervision of the CNMV

The functions of the National Securities Market Commission include the supervision and inspection of the securities markets and the activity of those who participate in them. Its supervision and inspection actions are accompanied by sanctioning authority plus other powers of control and correction.

The objective of endowing the CNMV with these powers is to ensure the transparency of the markets and their prices and the protection of investors. Tasks for which it is essential to promote a neat and transparent information regime.

In this sense, the Securities Market Law already required authorization from the Ministry of Economy and Competitiveness when it came to advertising certain activities. Furthermore, the authorization regime also implied the possible intervention of the CNMV by sanctioning or imposing the cessation or rectification of illicit advertising.

The novelty of RDL 5/2021 on advertising

RDL 5/2021, of March 12, on extraordinary measures to support business solvency in response to the Covid-19 pandemic, tries to protect the productive fabric against the income's reduction that the health crisis has entailed. To this end, it has issued packages of measures aimed at increasing the liquidity of companies. Among them: financial support, moratoriums and direct aid.

But apart from direct promotion measures, the public authorities have also considered it necessary to protect both citizens and investors in terms of investment in financial assets in the digital sphere.

In this sense, crypto-assets do not have a specific regulatory framework yet (either at the national or community level), despite representing an increasingly prominent volume in our economies.

These financial products present specific risks, which the CNMV and the Bank of Spain try to tackle in defence of the small investor.

What are crypto-assets and what are their risks?

RDL 5/2021 defines crypto-assets as "digital representations of value or rights that can be transferred and stored electronically through distributed ledger technology or similar".

As we can see, the real difference between crypto-assets and another class of assets with digital representation (such as money itself) lies in their transmission and storage systems.

Crypto-assets have several advantages. They are fast, safe, confidential (to a certain extent). But they also have their counterparts:

• Firstly, the absence of a specific regulatory framework. While this element brings agility to cryptocurrencies and other similar products, it also represents a degree of legal uncertainty.
• Secondly, the possibility of anonymous transactions. Although this element is also usually used as an advantage, the truth is that it facilitates the carrying out of illicit operations and the exploitation of a crime.
• Thirdly, the importance of adequately protecting cryptographic keys. The access to these keys can represent a security breach that would expose the assets of all investors.
• Finally, the growth of crypto-asset as products for investment. It is not only specialized or experienced investors who invest in cryptocurrencies and other digital assets. The general public has welcomed these products even without knowing the technology on which they operate or their specific risks.

The ability to impose an advertising regime 

Alerted by these risks, the CNMV and the Bank of Spain warned on February 9 (although they had already addressed the matter on previous occasions) about the volatility, potential lack of liquidity and complexity of these investments. They particularly highlighted the dangers of these risks for small investors.

Precisely for this reason, They reformed the Securities Market Law, increasing the powers of the CNMV. With the entry into force of RDL 5/2021, the body may: 

• Submit crypto-asset advertising to administrative control. Up to now, the LMV did not regulate these types of instruments, although it is increasingly common offering them as investment products.
• Develop using internal regulations the control mechanisms and procedures to be applied in this sector.

How will the advertising control in cryptocurrency offerings be effective?

Endowing the CNMV with powers of control would be useless if not coupled with the sanctioning function. In this sense, the modification of the LMV includes another article dedicated to infractions due to breach of obligations.

Thus, the art. 292.4 of the LMV is amended to consider a serious offence advertising in violation of arts. 240 and 240 bis and its implementing regulations. We are not, therefore, before a mere duty. Rather, it is an obligation, the breach of which carries legal consequences.

Such consequences include the following penalties:

• Fines. They can be calculated based on the profit obtained or the company's resources and the ones employed for the infringement (triple the profit or 2% of such funds, respectively). A fine of € 300,000 may also be imposed.
• Suspensions and limitations. Of the type or volume of operations, the condition of a member, the secondary market or trading system, the administration or management position...
• Restitution of profits obtained or losses avoided.
• Prohibitions and disqualifications to negotiate or hold any position.
• Public reprimands in the BOE.

In any case, the firm sanctions regarding this matter feature in the BOE. Thus, the infringement of the measures adopted in RDL 5/2021 will not only affect the company's patrimony but also its reputation.