As crypto trading platforms are brought into the regulatory tent, there’s a growing risk of investor confusion about the regulatory status of the products and services that are being sold on these platforms, the European Securities and Markets Authority (ESMA) warns.
In a statement, ESMA cautioned investors about the risk of a “halo effect” that may arise when regulated crypto firms offer both regulated and unregulated products and services side-by-side on their platforms — which may result in investors overlooking the added risk of buying unregulated products and services.
In these situations, “there is a significant risk that clients and prospective clients misunderstand the protections they are afforded,” the regulator said in its statement. It noted that unregulated products don’t have the same safeguards when it comes to issues such as managing conflicts of interests, complaint handling requirements, safeguarding clients’ assets and ongoing supervision.
Given its concerns, the regulator also provided new guidance to crypto firms, calling on them to take measures to avoid client confusion and the added investor protection risks that can arise from this halo effect.
“To avoid any misunderstanding [crypto platforms] should clearly communicate the regulatory status of each product or service in all client interactions and at every stage of the sales process,” it said.
Additionally, ESMA reiterated the obligations of regulated crypto firms to act fairly, in the best interests of their clients, and to ensure that client communications are “fair, clear and not misleading.”
Separately, ESMA also published guidance on proficiency standards for staff at crypto firms that provide information or advice on crypto products and services.
Among other things, it provides guidance on the “minimum level of knowledge and competence” for firms’ staff and it addresses specific features and risks of crypto markets and services in assessing staff’s knowledge.
ESMA said that the guidance aims to help crypto platforms “meet their obligations and act in the best interest of their clients,” and to help regulators assess firms’ performance.
“The objective is to enhance investor protection and trust in the crypto asset markets,” it said.