3.6.1. Verification of information

(1) In addition to requirements set out in Chapter 3 of the COB, a Digital Asset Service Provider Advising on Investments must provide advice which does not contain statements, promises, forecasts or other types of information which it knows or suspects to be misleading, false or deceptive or which it should have reasonably known to be misleading, false or deceptive at the time of making such statement, promise or forecast.

(2) Prior to making any statement, promise or forecast, a Digital Asset Service Provider Advising on Investments must verify factual information against appropriate and reliable source materials and must use all reasonable endeavours to verify the continued accuracy of such information.

3.6.2. Methodology

A Digital Asset Service Provider in the course of Advising on Investments must assess a broad range of Digital Assets available to the Client which should be sufficiently diverse such that the Client’s investment objectives, as agreed with the Digital Asset Service Provider, are met. A Digital Asset Service Provider must be clear with Clients what range of Digital Assets have been considered in the course of Advising on Investments.

3.6.3. Appropriateness test

(1) A Digital Asset Service Provider Arranging Deals in Investments must not carry on a Regulated Activity with or for a Retail Client unless the Digital Asset Service Provider has carried out an appropriateness test of the Retail Client and formed a reasonable view that the Retail Client has:

(a) adequate skills and expertise to understand the risks involved in trading in Digital Assets or Digital Asset Derivatives (as the case may be); and

(b) the ability to absorb potentially significant losses resulting from trading in Digital Assets or Digital Asset Derivatives (as the case may be).

(2) A Digital Asset Service Provider must maintain records of the appropriateness test that it carries out in respect of each Retail Client and make such records available to the AFSA on request.

(3) A Digital Asset Service Provider must have appropriate systems and controls and policies and procedures to determine the appropriateness of Retail Clients

Guidance:

(1) To form a reasonable view referred to in DAA 3.6.3.(1) in relation to a Retail Client, a Digital Asset Service Provider should consider issues such as whether the Retail Client:

(a) has sufficient knowledge and experience relating to the type of a Digital Asset or Digital Asset Derivative offered, having regard to such factors as:

(i) how often and in what volumes that Person has traded in the relevant type of a Digital Asset or Digital Asset Derivative; and

(ii) the Retail Client’s relevant qualifications, profession or former profession;

(b) understands the characteristics and risks relating to Digital Assets or Digital Asset Derivatives, and the volatility of their prices;

(c) understands the impact of leverage, due to which, there is potential to make significant losses in trading in Digital Assets or Digital Asset Derivatives; and

(d) has the ability, particularly in terms of net assets and liquidity available to the Retail Client, to absorb and manage any losses that may result from trading in the Digital Assets or Digital Asset Derivatives offered.

(2) To be able to demonstrate to the AFSA that it complies with DAA 3.6.3., a Digital Asset Service Provider should have in place systems and controls that include:

(a) pre-determined and clear criteria against which a Retail Client’s ability to trade in Digital Assets or Digital Asset Derivatives can be assessed;

(b) adequate records to demonstrate that the Digital Asset Service Provider has undertaken the appropriateness test for each Retail Client; and

(c) in the case of an existing Retail Client with whom the Digital Asset Service Provider has previously traded in Digital Assets or Digital Asset Derivatives, procedures to undertake a fresh appropriateness test on at least an annual basis, and if:

(i) a new Digital Asset or Digital Asset Derivative with a materially different risk profile is offered to the Retail Client; or

(ii) there has been a material change in the Retail Client’s circumstances.

(3) If a Digital Asset Service Provider forms the view that it is not appropriate for a Person to trade in Digital Assets or Digital Asset Derivatives, the Digital Asset Service Provider should refrain from offering that service to the Person. As a matter of good practice, the Digital Asset Service Provider should inform the Person of its decision.