The Code and Standards Apply to Financial Advice About Cryptocurrency-Related Assets
On December 5, 2022, the CFP Board issued a notice to CFP professionals in response to questions raised regarding cryptocurrency-related assets. Cryptocurrency-related assets, including cryptocurrency, cryptocurrency exchange traded funds, cryptocurrency derivatives, and interests in business entities that provide services related to cryptocurrency, are financial products that fall within the Certified Financial Planner Board’s definition of Financial Assets. Consequently, a recommendation that a client invest in cryptocurrency-related assets is Financial Advice that is subject to the Fiduciary Duty, Duty of Competence and Duty of Care outlined in the Code of Ethics and Standards of Conduct (“Code and Standards”). The particular attributes and heightened risks that these assets present must be considered when providing guidance to clients.
Regulators Caution that Investments in Cryptocurrency-Related Assets Present Significant Risks
The Code and Standards does not require, nor does it prohibit, the provision of advice concerning cryptocurrency-related assets. Nonetheless, CFP certificants who provide cryptocurrency advice should proceed cautiously and ensure they have the requisite background and understanding to competently address this topic. Financial regulators have expressed concern about the heightened risk that investments in cryptocurrency-related assets present. These risks must be considered when providing financial advice regarding cryptocurrency-related assets. Cryptocurrency-related assets:
- Can be speculative and volatile investments
- Present challenges in evaluating and analyzing these assets, making informed investment decisions difficult
- May present custodial risks, exposing investors to heightened risk of theft or loss
- May not be subject to traditional valuation, accounting, or reporting treatment
- May be unregistered or offered through providers not subject to existing regulations
- May be subject to future unpredictable regulation
Duty of Competence when Providing Financial Advice about Cryptocurrency-Related Assets
Under the Duty of Competence, a financial professional who lacks competence to provide financial advice regarding cryptocurrency-related assets must either gain competence, obtain assistance from a competent professional, limit or terminate the engagement, and/or refer the client to another professional who is reasonably believed to be competent in cryptocurrency-related assets. Developing competence in this area is difficult, due to the limited availability of reliable information.
Fiduciary Duty and Duty of Care when Providing Financial Advice about Cryptocurrency-Related Assets
A financial professional must act in the best interest of the client with care, skill, prudence, and diligence, in consideration of the client’s goals, risk tolerance, and objectives. The professional must consider:
The client’s risk capacity and tolerance – Cryptocurrency-Related Assets can be speculative and volatile. These assets lack a historical track record, creating additional uncertainty.
Valuation – There is no commonly-accepted valuation methodology for many cryptocurrency-related assets, creating a lack of reliability and accuracy.
Volatility – Because cryptocurrency-related assets can be volatile, with limited available information, monitoring of the investments can be difficult.
Tax and record keeping issues – Clients invested in cryptocurrency-related assets may not receive tax documentation, making recordkeeping and reporting difficult.
Evolving regulatory landscape – Regulation uncertainty may affect the client’s investment. Examples may include limitations on trading ability or tax treatment of the investment.
Custody and Risk of Theft or Loss
Evidence of cryptocurrency ownership may be via a private key, which is a secure alphanumeric code. If the private key is lost, stolen or forgotten, the cryptocurrency may not be able to be accessed. Cryptocurrency transactions typically cannot be reversed, creating a serious risk of loss. Owners of cryptocurrency may store and manage private keys in “digital wallets,” which vary in security and features. Agencies such as FDIC or SIPC currently do not protect virtual currency accounts and private insurance is not widely available. Financial professionals must advise clients of the risks related to the security and viability of the exchange, wallet and custodian. They must also be mindful of their responsibility to use a “qualified custodian” to hold client assets.
A client’s investment in cryptocurrency-related assets affect the client’s goals, liquidity, cash flow, and taxes, all of which must be considered by a financial professional in developing financial planning recommendations. Consideration must also be given to estate planning, such as creating a plan for the transfer of a private key, if a client passes away.
The same standards apply to cryptocurrency-related assets that apply to all financial assets, including Fiduciary Duty and the Duty of Competence. Cryptocurrency-related assets present particular attributes and heightened risks that must be considered when providing financial advice.