With the growing importance of crypto assets in the global financial system, regulatory authorities are increasing their pressure on this asset class. In particular, the International Organization of Securities Commissions (IOSCO) has intensified its efforts in recent years to monitor the crypto market more closely. IOSCO is a global organization composed of national regulatory authorities that aims to minimize systemic risks in financial markets. Since 2019, IOSCO has begun to monitor the crypto market more closely and sees it as a potential risk that needs to be controlled by appropriate measures.
The data published in 2024 shows that despite the “crypto winter” of 2022, a period in which the prices of many crypto assets fell sharply, interest from retail investors continues to grow. This has raised concerns among regulators that the crypto market could cause significant economic damage without effective supervision. The aim of this article is to highlight the measures proposed by IOSCO and to analyze their possible impact on the crypto market.
Systemic Risks from Crypto Assets
One of the main reasons why crypto assets have come under the scrutiny of regulators is the potential threat they pose to the stability of the financial system. IOSCO argues that crypto assets, in particular Bitcoin and other large digital assets, have grown significantly in importance in recent years. The authority points out that between 6% and 10% of retail investors in more than half of the countries surveyed are invested in crypto assets. This shows that crypto assets play an increasingly important role in the portfolios of many retail investors.
One of the biggest concerns for regulators is the volatility of crypto assets. These strong price fluctuations, as seen during the “crypto winter” of 2022, for example, can not only lead to significant losses for individual investors but also destabilize the entire financial system if large losses occur simultaneously. For this reason, IOSCO sees the need for greater regulation of the crypto market to minimize potential systemic risks.
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Education As a Protective Measure for Investors
A key topic in IOSCO’s report is the protection of retail investors through education. According to the data collected, many investors do not fully understand how crypto assets work and what the risks are. This is cited as the main reason why many potential investors are hesitant to enter the market despite growing interest. Almost 80% of respondents said they believe that better education about crypto assets is needed. At the same time, however, around 70% of respondents believed that crypto assets pose a significant risk to investors.
IOSCO sees education as a way to protect investors from the numerous frauds and risks of the crypto market. For example, the report cites the well-known cases of Terra and FTX, two major crypto projects that collapsed in 2022 and 2023, causing billions in losses. These cases have shaken the confidence of many investors in the market and highlighted the need for greater education. The aim is not only to educate investors about the risks of crypto assets, but also to help them learn how to make informed decisions and invest responsibly in this asset class.
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The Growing Importance of Retail Investors
Another key theme of the report is the growing participation of retail investors in the crypto market. IOSCO has found in a survey that the interest of retail investors in crypto assets has increased significantly since 2019. Despite last year’s market volatility, the data shows that the percentage of retail investors who are very interested in crypto assets has risen sharply. This suggests that many investors are attracted to crypto assets despite the volatility and risks.
The question of why many of these interested investors have not yet entered the market is particularly interesting. According to IOSCO, the main reasons for this are a lack of understanding, the high risks, the volatility of the market, the lack of regulation and the fear of fraud. These reasons are listed in exactly this order, with a lack of understanding being cited as the biggest obstacle. This again highlights the importance of educational measures to strengthen investor confidence in the market.
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Reasons for Investing in Crypto Assets
In its report, IOSCO also examined why investors nevertheless decide to invest in crypto assets. The most common motivation is the so-called “Fear of Missing Out” (FOMO), i.e. the fear of missing out on a potentially lucrative investment opportunity. Many retail investors have seen how sharply the value of Bitcoin and other crypto assets has risen in the past and do not want to miss the next upward movement.
Another reason, which is less obvious, is the low entry price of many crypto assets. Smaller crypto assets in particular are attractive to many investors because they trade at a fraction of the price of established coins like Bitcoin or Ethereum. Retail investors are often guided by the low price of a token, overlooking the market capitalization, which actually reflects the potential of a cryptocurrency. Social media and recommendations from friends also play a major role in the decision to invest in crypto assets.
The Influence of Social Media and the Challenges of Education
Social media has emerged as one of the main sources of information for retail investors. This represents both an opportunity and a risk. Many investors get information about crypto assets from platforms such as Twitter, YouTube or Instagram, which leads to the rapid spread of messages and trends. At the same time, this information is often inaccurate or misleading, increasing the risk of bad investments.
Regulators such as IOSCO have recognized that they need to use these platforms to disseminate their educational content. However, they are struggling to effectively use social media algorithms to reach their target audience. While some countries, such as Singapore, have successfully used local influencers to educate the public about the risks of crypto assets, others, such as the US, are struggling to regain investor confidence. Low attendance at online events shows that many investors have lost confidence in traditional institutions.
Risks in the Crypto Market
The IOSCO report lists numerous risks that investors in the crypto market need to consider. These include, among others:
Liquidity risks
Many crypto assets, especially smaller altcoins, have low liquidity. This means that it can be difficult to sell large quantities of a token without significantly affecting the market price.
Volatility
Crypto assets are known for their extreme price fluctuations. This can lead to significant losses if investors invest in a market phase in which prices fall sharply.
Counterparty risks
The crypto market is often unregulated, which means that there is no guarantee that the trading partner will meet its obligations.
Fraud risks
The number of fraud cases in the crypto market is high. Well-known examples such as FTX and Terra have shown how quickly investors can lose all their capital.
Regulatory risks
IOSCO emphasizes that uncertainty about future regulatory action also poses a significant risk. Many countries have not yet issued clear regulations for crypto assets, which increases uncertainty for investors.
Conclusion and Outlook
IOSCO’s report makes it clear that the crypto market will continue to be closely monitored in the future. The increasing participation of retail investors and the growing interest in crypto assets are leading regulators worldwide to take stronger action to mitigate risks to the financial system. At the same time, it is clear that these measures will not be enough to dampen investor interest. Rather, regulators need to expand educational efforts to fully educate investors about the risks and rewards of crypto assets.
Overall, the crypto market is expected to remain volatile and speculative, but with the right regulation and education, it could develop into a more stable and secure asset class. The market’s coming upturn, predicted by IOSCO, could show how well regulators’ actions are actually working.
Author
Ed Prinz serves as Chairman of https://dltaustria.com, the most renowned non-profit organization in Austria specializing in blockchain technology. DLT Austria is actively involved in the education and promotion of the added value and application possibilities of distributed ledger technology. This is done through educational events, meetups, workshops and open discussions, all in voluntary collaboration with leading industry players.
Disclaimer
This is my personal opinion and not financial advice. For this reason, I cannot guarantee the accuracy of the information in this article. If you are unsure, you should consult a qualified advisor you trust. No guarantees or promises regarding profits are made in this article. All statements in this and other articles are my personal opinion.