Suitability Of Crypto Products To Be Included In Regulatory Frameworks – IOSCO Recommendation

According to a May 23, 2023 media release, the International Organization of Securities Commissions (IOSCO) issued global recommendations to jurisdictions on the regulation of crypto and digital asset markets. IOSCO has requested comments on its recommendations through public consultation by July 31, 2023.

‘Retail access, suitability, and distribution’ of crypto assets is one of the key areas covered by IOSCO’s recommendations. IOSCO proposed that regulators should require crypto-asset service providers (CASPs) to operate in a manner consistent with its standards regarding interactions and dealings with retail clients.

This includes assessing the appropriateness and/or suitability of particular crypto-asset products and services offered to each retail client. In developing new frameworks for crypto and digital asset markets, regulators should consider imposing requirements related to suitability/ appropriateness assessments.

Client Suitability Assessment enables CASPs to profile potential clients to choose the best investments aligned to their objectives, risk tolerance, preferences, experiences, specific needs and circumstances, among other factors.

As per IOSCO recommendations, If CSAPs use suitability assessments, regulators should require that the assessments are robust enough not to give clients the impression that they fully understand the operations and the related risks of crypto asset markets.

IOSCO further proposes that where a prospective client does not demonstrate sufficient knowledge, the CASP should not permit that client to trade crypto assets.

On the retail distribution of crypto-assets, IOSCO has requested public feedback on what other safeguards should be adopted, whether regulators should take steps, and to what extent to restrict advertisements and endorsements promoting crypto-assets.

Following the crypto market bankruptcies in 2022 and events surrounding the collapse of the FTX crypto exchange, the technical committee of IOSCO published a consultation report in February 2023 on the suitability requirements for complex financial products.

The report set out proposed principles relating to customer protection, including suitability and disclosure obligations relating to the distribution of complex financial products to retail and non-retail customers by intermediaries.

Following the issuance of its recommendations, IOSCO has requested jurisdictions to review them against their current regulatory frameworks to ensure compliance with its standards and to fix any gaps as soon as possible. IOSCO aims to finalize its recommendations by the end of the year. 

In an April 2023 media release, IOSCO published its work program for 2023-24. The work program called for IOSCO to maintain the momentum from its July 2022 crypto-asset roadmap and to assess and respond to the risks associated with crypto-asset market activities and decentralized finance.

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