COBS 10 Annex 4 Assessing appropriateness: qualifying cryptoassets

This Annex belongs to COBS 10.2.9G(1)(n).

1When determining whether a retail client has the necessary knowledge to understand the risks involved in relation to a qualifying cryptoasset, a firm should consider asking the client questions that cover, at least, the matters in (1) to (12).

Firms may need to ask additional or alternative questions to ensure that the retail client has the necessary knowledge to understand the risks involved in relation to the specific type of qualifying cryptoasset offered.

The matters are:

1. (1)

   the role of the business offering or marketing the qualifying cryptoasset (the business) and the scope of its services, including what the business does and does not do on behalf of clients, such as what due diligence is and is not undertaken by the business on any underlying investments;

2. (2)

   the nature of the client’s rights and obligations with the business, in particular the nature of the legal and beneficial ownership of the qualifying cryptoasset and the risks associated with those rights;

3. (3)

   that the client can lose all of the money that they invest in a qualifying cryptoasset;

4. (4)

   the potential complexity of investments in qualifying cryptoassets and the associated difficulty of understanding the risks of the investment;

5. (5)

   that the performance of many qualifying cryptoassets can be highly volatile and that the value of an investment in a qualifying cryptoasset can fall as quickly as it can rise;

6. (6)

   the risk of losing money or any qualifying cryptoassets purchased as a result of operational risks (such as through cyber-attacks, loss of private keys, comingling of funds) or financial crime;

7. (7)

   the risk to any management and administration of the client’s investment in the event of the business becoming insolvent or otherwise failing;

8. (8)

   that the client may not be able to readily sell their qualifying cryptoasset investment, including as a result of market illiquidity or operational outages;

9. (9)

   the regulated status of the business offering or marketing the qualifying cryptoasset and the investment activity and the implications of this in relation to FCA regulation;

10. (10)

    the extent to which the protection of the Financial Ombudsman Service or FSCS apply to the investment activity (including the fact that these services do not protect investors against poor investment performance and that the Financial Ombudsman Service cannot ordinarily consider complaints in relation to unauthorised persons);

11. (11)

    that investing in, and holding, qualifying cryptoassets is not comparable to investing in mainstream investments such as listed or exchange-traded securities; and

12. (12)

    the benefits of diversification and that retail clients should not generally invest more than 10% of their net assets in restricted mass market investments.