Advice on Crypto-assets : Obligations of the authorised advisors under the proposed European Regulation on Markets in Crypto-assets
By George Kazoleas, Lawyer LL.M.
The proposed European Regulation on Markets in Crypto-assets, and amending Directive (EU) 2019/1937, published in September 2020, introduces new legislation on crypto-assets (a digital representation of values or rights that can be stored and traded electronically). The purpose of the proposed regulation is to safeguard financial stability as well as to protect investors from potential risks.
One of the regulated areas of the proposed legislation is the activity of crypto advisors. Any person that provides crypto-asset services on a professional basis should be considered as a ‘crypto-asset service provider’.
Providing advice on crypto-assets is explicitly part of the meaning of ‘crypto-asset service’ and means "offering, giving or agreeing to give personalised or specific recommendations to a third party, either at the third party’s request or on the initiative of the crypto-asset service provider providing the advice, concerning the acquisition or the sale of one or more crypto-assets, or the use of crypto-asset services".
According to article 73 of the Regulation, crypto-asset service providers that are authorised to provide advice on crypto-assets shall assess the compatibility of such crypto-assets with the needs of the clients and recommend them only when this is in the interest of the clients. The assessment must be reviewed by the advisors every two years after the initial assessment.
The crypto-assets advisors shall also ensure that natural persons giving advice or information about crypto-assets or a crypto-asset service on their behalf possess the necessary knowledge and experience to fulfil their obligations.
For this purpose, crypto-assets advisors shall request information about the client or prospective client’s knowledge of, and experience in crypto-assets, objectives, financial situation including the ability to bear losses and a basic understanding of risks involved in purchasing crypto-assets.
Fluctuation of the value of crypto-assets should be a warning to investors. Crypto-assets advisors shall also establish, maintain and implement policies and procedures to enable them to collect and assess all information necessary to conduct this assessment for each client. They shall take reasonable steps to ensure that the information collected about their clients or prospective clients is reliable.
Where clients do not provide the above information, or where crypto-asset service providers that are authorised to provide advice on crypto-assets consider that the prospective clients or clients have insufficient knowledge, these clients must be informed that the crypto-assets or crypto-asset services may be inappropriate for them and a warning on the risks associated with crypto-assets must be issued. That risk warning shall clearly state the risk of losing the entirety of the money invested or converted into crypto-assets. Clients shall expressly acknowledge that they have received and understood the warning issued by the crypto-asset service provider concerned.
Paragraph 7 of the article 73 provides for the obligation to issue a report summarising the advice given to the clients. That report shall be made and communicated to the clients in a durable medium and, as a minimum will (a)specify the clients’ demands and needs and (b) provide an outline of the advice given.
Τhe above obligations to be fulfilled by authorized persons/entities providing advice on crypto-assets must be the minimum protection of investors. As the world of crypto-assets is still terra incognita to the non-specialist public, the role of consultants will be crucial to investing. There is already a large supply, mainly online, of consulting/advising services regarding crypto-assets , and the regulation of its operation is incomplete or even non-existent. The proposed EU regulation is a first step in ensuring a satisfactory legal framework for the operation of crypto-assets advisors and the issue of investor compensation for damage they may suffer from incorrect or incomplete advice on crypto-assets should also be considered.
* Giorgos Kazoleas is lawyer in Greece & Cyprus (Dionysiou & Partners LLC, Nicosia)