Critical Messages from the IOSCO Report
Crypto-Asset Interest and Risks on the Rise
The International Organization of Securities Commissions (IOSCO) recently published its final report on investor education on crypto-assets. The report found that investor interest in crypto-assets is increasing, with 15 of the 24 surveyed jurisdictions reporting that 6%-10% or more of their investors owned crypto-assets. Six of those jurisdictions reported that 10%-30% or more of their investors owned crypto-assets. This is a significant increase from the 2020 report in which half of the respondents estimated that 1%-5% or less of their investors owned crypto-assets.
This growth in interest comes despite the numerous risks inherent in crypto-asset investing. Recent events, including the 2022 “crypto winter,” highlight the volatility of these markets. The crypto-asset market experienced a severe downturn in 2022, with bitcoin’s value dropping from a high of nearly US$69,000 in November 2021 to near US$16,000 by November 2022. This downturn was triggered by several factors, including rising inflation, increasing interest rates, and a series of high-profile frauds, failures, and bankruptcies in the crypto-asset industry. High-profile failures such as the collapses of TerraUSD/Luna and FTX, as well as the bankruptcy of Three Arrows Capital, underscore the risk of fraud and the potential for significant investor losses in this market.
IOSCO’s Key Investor Education Messages
In light of these trends, IOSCO’s report emphasizes the critical importance of investor education to help protect retail investors, particularly new and unsophisticated investors, in the crypto-asset market. The report emphasizes the need for educational messages to be tailored to the specific issues of crypto-assets and targeted at new and younger investors.
5 Critical Investor Education Messages from IOSCO
The IOSCO report outlines several key educational messages that regulators should communicate to retail investors interested in crypto-assets. Here are five critical messages:
- Crypto-Asset Investments are Exceptionally Risky and Volatile. Crypto-assets are subject to various risks, including market liquidity risk, volatility risk, counterparty risk, risk of loss, insufficient disclosure, technical and operational risks, cybersecurity risks, and fraud. Investors need to understand and carefully consider these risks before investing in crypto-assets.
- Exercise Caution with Social Media and “Finfluencers.” New and younger investors often rely on social media for information about crypto-assets. However, social media can amplify hype, promote speculative investments like “meme coins”, and facilitate fraud. Investors should be skeptical of information and investment advice obtained through social media and should never make investment decisions based solely on information from social media, including “finfluencers”.
- Crypto-Asset Investments May Lack Basic Investor Protections. Entities offering crypto-asset investments and services may not be complying with applicable laws and regulations, including registration and licensing requirements. This can leave investors with little or no protection in cases of fraud, mismanagement, or platform failures.
- Investments Offered in Compliance with Regulatory Frameworks Provide Greater Investor Protection. When crypto-asset offerings comply with a jurisdiction’s regulatory framework, investors have certain protections. These may include requirements for disclosures, registration of entities and offerings, and adherence to rules designed to prevent fraud and manipulation.
- Fraud Remains Pervasive in the Crypto-Asset Market. Fraudsters continue to target crypto-asset investors through various schemes, including Ponzi schemes, exit scams, pump-and-dump schemes, market manipulation, and relationship investment scams. Investors need to be aware of these schemes and take steps to protect themselves.
Importance of a Long-Term Investment Plan
In addition to understanding the risks of crypto-assets, investors should develop a sound, long-term investment plan that aligns with their financial goals, risk tolerance, and time horizon. Investors should consider the role of crypto-assets in their overall investment portfolio and the importance of diversification.
IOSCO Encourages Investor Education Efforts
IOSCO strongly encourages its members to develop and implement investor education initiatives specifically focused on crypto-asset issues, using a variety of channels to reach a wide audience, particularly new and younger investors.
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