Guide for Crypto-Asset Investors and Providers: Understanding Suitability in MiCA

MiCA, or the Regulation on Markets in Crypto-Assets, is a new EU regulation aimed at providing a comprehensive framework for the issuance and trading of crypto-assets, as well as related services.

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As part of this framework, the European Securities and Markets Authority (ESMA) has issued guidelines to ensure that crypto-asset service providers (CASPs) offering portfolio management services comply with specific suitability requirements.

These guidelines outline the obligations that CASPs must follow to ensure their services are suitable for their clients. The key areas covered are:

• Communication with Clients:

CASPs must clearly inform clients about the purpose and scope of the suitability assessment, emphasizing the importance of providing accurate information and avoiding ambiguities about responsibilities. For automated advice (robo-advice), there must be transparency in how decisions are made and opportunities for human interaction.

• Understanding Clients:

CASPs must use clear and specific questions to gather comprehensive data from clients, including personal and financial details, and assess their understanding of investment risks, particularly those associated with crypto-assets. The information collected must be proportional to the complexity of the crypto-assets and the client’s level of sophistication.

• Reliability and Updating of Client Information:

Ensuring client information is accurate and reliable is essential, using appropriate methods to verify it and updating it regularly, at least every two years, and in response to significant life events or changes in financial circumstances.

• Handling Legal Entities or Groups:

CASPs must develop policies to manage suitability assessments for legal entities or groups, considering both the representative’s characteristics and those of the underlying client, with a prudent approach to differences within the group.

• Understanding Crypto-Assets:

CASPs must maintain up-to-date knowledge of the characteristics and risks associated with the crypto-assets they offer, including credit, market, liquidity, and cybersecurity risks, ensuring the information is reliable and current.

• Suitability of Investments:

CASPs must match clients with suitable crypto-assets and services, considering their risk profiles, financial objectives, and portfolio diversification, and monitor and update automated tools to reflect current market conditions and regulatory requirements.

• Consideration of Costs and Complexity:

It is necessary to evaluate the costs and complexity of different investment options, justify any selection that is more costly or complex, and inform clients about any restrictions in the range of products offered.

• Assessment of Switching Costs:

CASPs must analyze the costs and benefits of changing investments, including monetary and non-monetary factors, and communicate them in the suitability report, monitoring circumvention risks.

• Staff Qualification:

Personnel involved in suitability assessments must be adequately trained and knowledgeable about crypto-assets, regulatory requirements, and any automated tools used, ensuring their understanding and skills for the role.

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Deciphering the Enigma: The Definitive Guide to Classifying Crypto-Assets According to ESMA. MiCA or MiFID 2?

On December 17, 2024, ESMA published a final report on criteria for classifying crypto-assets, ahead of the imminent entry into force of the MiCA regulation. Below is a brief guide to the most relevant issues addressed

These guidelines are crucial for enhancing investor protection in the crypto-asset market, ensuring that CASPs thoroughly assess the suitability of their services and products for each client, maintaining high standards of due diligence and transparency.

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