Why aren’t digital asset providers held to their promises?

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The digital asset industry has somewhat of a reputation for being a haven for scammers and criminals, where clearly illegal behavior is not punished, or punished differently than it otherwise would be in any other context. While this reputation might be well-earned, it is being steadily eroded by increasing commitment from law enforcement and regulators to hold bad actors to account.

However, the industry has a specific problem which, despite hurting consumers and adoption, receives little attention. The problem is dishonest advertising. Digital assets run almost entirely on hype, meaning advertising is everything. This is compounded by the fact that so much interest in digital assets is driven by price speculation, meaning large portions of the community have a vested interest in overlooking dishonest advertisers or worse, propagating the advertising themselves.

This has often led to a cart-before-the-horse situation, where minor products, services and innovations are advertised as revolutionary, or cast as a harbinger of mass adoption. This message is broadcast to an audience who have been primed, through continual community reinforcement, to accept this message without critique.

Take the attention that PayPal’s announcement that it would be supporting BTC received as an example—this was touted as the toppling of a huge domino on the way to mass adoption, yet the offering itself was inconsequential.

However, the fact remains: there are well developed bodies of law which protect consumers from misleading trade practices, and they have only been allowed to continue by the grace of regulatory inaction.

It is inevitable that this will change.

Revolut’s unfulfilled promises

An example which demonstrates all at once how detached corporate promises have become from reality, how easily they have been allowed to remain unchallenged, and how consumers are paying the price is that of Revolut.

Revolut is one of the more well-known fintech companies to have cropped up in recent years to promise a revolution in money management. In 2017, Revolut entered the digital asset game by offering customers the ability to buy “cryptocurrency” on the platform. The announcement touted the service as the “easiest and fastest way to buy cryptocurrency,” while Revolut’s homepage is plastered with its crypto purchasing features. The impression given by Revolut’s homepage—in plain English terms—is that their service can be used to purchase digital assets.

Years after the service was introduced, Revolut changed its terms and conditions on July 27, 2020, introducing the idea of ownership of the rights to the financial value of the digital asset despite there being no previous indication that this was not the status quo. In an email informing users of this change, Revolut said: “This essentially means that you will now own any cryptocurrency you buy using Revolut!”

Veterans familiar with digital asset advertising will know to interpret the word ‘essentially’ as ‘not at all,’ a correct assumption judging by the terms and conditions themselves. Any digital asset purchase or sale made on Revolut is merely an instruction for Revolut to make the purchase or sale on your behalf. In the case of a purchase, you are only purchasing a ‘beneficial right’ to the asset, which Revolut says means you have the right to tell them when to sell or transfer the asset, but in reality, any such instruction can be accepted or rejected in accordance with Revolut’s terms and conditions, which is so broad as to essentially grant Revolut complete discretion over which instructions to accept and which to ignore.

“Sometimes we might refuse your instruction to buy or sell cryptocurrency. If we do, we will not be responsible for any losses you suffer as a result.”

So, you aren’t purchasing coins, just purchasing the right to the value, and you can only realize that value by instructing Revolut to sell—instructions which Revolut can unilaterally decline to follow. If a company assures you that you own something despite the company having custody of that thing and which the company has near-total control over how that something is accessed and dealt with, then that is not ownership. 

Not only is this nothing close to the impression given by Revolut’s marketing materials, but in essence (though not in name) what Revolut is offering is a contract for difference (CFD)—an agreement for a buyer to pay the seller the difference between the current value of an asset and its value at some future date in time. CFDs are vehicles for speculation, allowing for buyers the chance to profit off predicted movements in price. CFD trading is illegal in the U.S., and CFDs based on digital assets were banned in the U.K. by the Financial Conduct Authority from this year. CFDs are given special attention by regulators due to this speculative nature and the risks they pose to investors.

Revolut’s shtick is more egregious when you look at the effort it expends to try and convince customers (or would-be customers) to ‘purchase’ digital assets through their services. In January, amidst accelerating BTC prices and cacophonous hype, Revolut posted a blog in which it said: “It took Bitcoin 11 years to get to $20,000, but only about 3 weeks to double that to $40,000. In 2020 alone, the value of bitcoin grew by over 400%. You can get in on the action from just $1 – starting small is OK!”

Revolut appears to be trying to toe the line between appealing to the speculative investor within its potential customers to generate as much interest as possible while at the same time presenting itself as a sensible pathway into digital asset ownership.

PayPal is the cart coming before the horse

PayPal is another offender. In October of 2020—again in the context of climbing digital asset prices—the company announced it was launching a new service “enabling users to buy, hold and sell cryptocurrency.” Once again, the terms and conditions reveal this to be meaningless marketing only:

You currently are NOT able to send Crypto Assets to family or friends, use Crypto Assets to pay for goods or services, or withdraw Crypto Assets from your Cryptocurrencies Hub to an external cryptocurrency wallet. If you want to withdraw the value from your Cryptocurrencies Hub you will need to sell your Crypto Assets and withdraw the cash proceeds from their sale.

In that sense, you can only ‘buy’ digital assets using this service if you are wanting to hold them or eventually redeem them for cash value. You cannot move these assets to another wallet, nor can you send them to another person. Again, this is not ownership.

Further, any breach of PayPal’s terms gives PayPal the ability to stop you from selling your assets, and upon any decision to close an account, PayPal has the discretion—not the obligation—to liquidate your “holdings.” In that event, PayPal is not required to notify you of the sale in advance, nor are they required to return the best price.

PayPal can also unilaterally seize whatever amount of digital assets that are associated with your account if it suspects “a transaction relating to those [digital assets] involves money laundering, terrorist financing, fraud, or any other type of crime.”

In the event a seizure can’t be fit within the incredibly broad boundaries set out above, the terms give PayPal the rights to your assets as soon as you breach any of their terms and conditions.

As with Revolut, there is also no way to verify that the assets have been purchased at all, and the terms of conditions naturally give no right of audit to their clients.

Miscellaneous services

Though Revolut and PayPal have thus far managed to escape significant scrutiny, they happen to be the more easily identifiable cases of deceptive bait-and-switch practices. Others are more subtle.

Jack Dorsey and Square’s CashApp enjoys similar headlines to PayPal and Revolut, allowing customers to buy and sell digital assets using the app. Unlike Revolut and PayPal, CashApp users can withdraw their digital assets and send them to other users.

However, even here there is a disconnect between the services being advertised and those actually offered. For example, while the possession of keys has little bearing on legal ownership, general caution is advisable when using any service which does not provide you the keys to virtual assets it says you own. CashApp imposes stringent withdrawal limits of no more than $1,250 per month, a paltry amount when you consider the rapid run up in value that digital assets are liable to experience.

As with PayPal and Revolut, customers have no way to truly verify what CashApp holds on your behalf beyond the balance displayed to you on the app, so the low withdrawal limits invite the question—would it be able to withstand a sudden rush for the exit, with most CashApp users looking to withdraw their Bitcoin at the same time?

False advertising can mean imprisonment

It is a strange state of affairs that arguably the sector most in need of consumer protection and most in need of strong regulation escapes scrutiny for what is a misrepresentation at best and fraud at worst. Consumer protection laws, such as those against false advertising, are addressed with these very situations in mind.

In the U.K., there are the Consumer Protection from Unfair Trading Regulations 2008, which prohibits misleading commercial activities, which can be as blatant as using false information in the promotion of a product or service but does not need to be: the information might be factually correct, but if it is presented in a way which is likely to deceive the average consumer, then this is prohibited too. Violations of the Regulations can lead to criminal prosecution, an unlimited fine and up to two years in jail.

In the U.S., the Federal Trade Commission (FTC) regulates advertising generally, and specific legislation at the local and federal level allows for private litigation in cases of false advertising. In addition to damages assessed in private litigation, the FTC can also levy fines and order corrective remedies, such as forcing refunds and public disclosures.

The Revoluts and PayPals of the world might be getting some cover from the general excitement of digital asset adoption. For instance, it is in the interests of digital asset institutions and experienced individuals who are already heavily invested in something like BTC for PayPal to announce it is allowing for the purchase and sale of crypto. These headlines end up being shared widely, providing another checked box to which evangelists can point to as evidence of ‘mass’ or ‘institutional’ adoption, regardless of the underlying reality. You can check this for yourself by comparing the announcements made by the likes of Revolut and PayPal (together with the community response) against the reality described above, noticing that the two seem entirely at odds with one another.

There is a real cost to this deception which runs parallel to the general damage being done to the industry’s credibility. Every person duped into thinking they own the BTC they paid Revolut for is a disaster waiting to happen. Whether that disaster comes in the form of a customer being unable to sell their assets on a price spike, getting their account holdings seized without recourse or appeal or some other inevitability is a lucky draw.

Exposing anti-consumer behavior is key for industry development

Thankfully, laws have already been written with this situation in mind. If you feel you’ve fallen victim to these misleading trade practices, avenues already exist for you to hold these companies to account, such as private litigation. If that doesn’t interest you, then rest assured you need only wait for the likes of the FTC to follow similar regulators and authorities in coming down hard on those companies and individuals who think the digital asset industry is safe from the law.

What matters, regardless of the path taken to get there, is that the digital asset community gets better at holding these companies to account for their promises. As exciting as the prospect of your digital asset of choice exploding in price might be, no good is done when corporations exploit this excitement by misleading customers into paying for bucket shop-like products and services, creating more generations of people who get burned when reality rears its head. 

As a part of our Crypto Crime Cartel series, we want to shine a light on unfair practices within the digital asset industry. We believe that exposing harmful, anti-consumer behavior is critical for the development of the industry. As such, if you have any experiences with misleading advertising, rogue digital asset providers preventing access to your holdings or any other unfair or misleading practice, then CoinGeek wants to get your story told. Please reach out via our contact form.