Retail Investors Express Interest in Crypto, Yet Market Volatility and Fraud Risks Deter Participation: IOSCO Report

Retail investors are showing a strong interest in cryptocurrencies despite the speculative and volatile nature of these virtual assets. The finding was highlighted in a report released by the Board of the International Organisation of Securities Commissions (IOSCO). The Madrid, Spain-based body said it surveyed 24 jurisdictions to compile this report titled “Investor Education on Crypto-Assets". The report, which was released this week, emphasises that the rising interest of large capital-equipped investors in crypto should be directed through focus on crypto awareness and education.

In its report, the IOSCO stated that even in 2022, when the crypto sector's valuation fell below $1 trillion (roughly Rs. 1,67,09,363 crore), retail investors continued to invest in crypto assets. This trend was evident not only among retail investors in advanced economies but also among those in emerging markets.

“Since 2020, the crypto-asset space has continued to evolve and, despite volatility in the market, which experienced a major downturn during the 2022 ‘crypto winter', retail investors continue to invest in the crypto-asset market, these investors tend to be younger and more demographically diverse,” the report said.

The report has brought to light that many of these younger investors from the retails sector are gathering their investment-related information from unauthorised, random sources. This practice, the IOSCO fears, can lead them into a situation of financial turmoil.

“These investors often rely on social media for investment information and tend to overestimate their investment knowledge and experience,” the report said.

The financial organisation asserts that governments must accelerate efforts to draft comprehensive crypto regulations tailored to their respective economies. Additionally, the report emphasises the need for investor education regarding the protections offered by regulatory frameworks and the risks associated with investing in non-compliant crypto assets.

IOSCO also identified several factors contributing to the gap between retail investors' interest in crypto assets and their reluctance to engage fully. These factors include extreme price volatility, potential losses, system malfunctions, hacking risks, fears of losing private keys, the proliferation of fake crypto assets, and the lack of consumer protection.

“Given the widespread lack of compliance in the crypto-asset space, fraudulent activity continues to be prevalent, and investors remain at significant risk of loss. Investors, including those new to investing, may not be as aware about how to avoid or look out for fraud when investing in this space. Being aware and cautious about the continuing prevalence of fraud remains an important message that regulators need to regularly communicate to and reinforce with investors,” the report noted.

Echoing findings from various research firms and legal institutions, including the FBI, IOSCO has recognised the increasing prevalence of crypto-related fraud in recent years.

The report highlights a significant rise in investment fraud, Ponzi schemes, exit scams, pump-and-dump schemes, and market manipulation tactics employed by cybercriminals, urging investors to conduct due diligence before engaging with unfamiliar crypto resources. For younger investors, the report cautions that FOMO should not drive them to hastily invest in these speculative and largely unregulated assets.

IOSCO is currently working to implement a crypto framework across its member jurisdictions, serving as a forum for national securities regulators and claims to have 130 jurisdictions under its umbrella. SEBI, India is also one of the members on the IOSCO Board.