As cryptocurrencies and cryptocurrency-related assets become an increasing part of financial discussions, CFP® professionals and QAFP® professionals (“Certificants”) are reminded that these assets may present significant risks that require heightened diligence.
This bulletin sets out best practices Certificants may wish to consider and incorporate when discussing cryptocurrencies and cryptocurrency-related assets with their clients. It provides practical guidance on how to ensure ethical and competent advice is provided to those interested or invested in cryptocurrencies and cryptocurrency-related assets. This guidance may also assist Certificants in complying with their professional obligations and the FP Canada Standards Council™ Standards of Professional Responsibility (the “Standards”).
What Are Cryptocurrency and Cryptocurrency Related Assets?
Cryptocurrencies are a type of digital asset that exist virtually and do not require a trusted third party, like a bank or government, to verify transactions. Instead, cryptocurrencies use a form of distributed ledger technology to secure information through cryptography and conduct transactions without a central authority. Cryptocurrencies can be highly volatile, are not issued or regulated by central banks, and instead can utilize a decentralized system to record transactions and issue new units.
Cryptocurrency related assets are assets that are linked to cryptocurrencies. Their value or how they are used in transactions depends on virtual currencies or digital systems that rely on cryptographic technology, including both decentralized blockchain based systems and centralized platforms or entities. These assets include, but are not limited to, virtual currencies, coins, and tokens. A blockchain is a public, distributed digital ledger that records transactions and account balances through a peer to peer network. Some cryptocurrency related assets may also operate through centralized systems that perform similar recording or transactional functions.
Associated Risks
While cryptocurrencies’ decentralized nature could be appealing to some clients, the digital asset has various risks. Some risks associated with cryptocurrencies include, but are not limited to:
- Volatility: Due to factors such as market structure and size, speculation and sentiment, regulatory uncertainty, continuous trading, concentrated ownership, and reliance on technology, cryptocurrencies can be volatile.
- Custody loss: The potential for permanent, irreversible loss of the access to cryptocurrencies caused by loss, theft, fraud, or mismanagement posses a significant risk;
- Valuation uncertainty: As there is no commonly accepted valuation methodology for cryptocurrencies, the value attributed may change frequently; and
- Taxation Uncertainty: Evolving tax implications, changing guidance, and reporting requirements cause uncertainty with regards to obligations pertaining to tax reporting of financial assets held by Canadians both in and outside of Canada.
Cryptocurrency-related assets pose the same risks as cryptocurrencies in addition to issuer risk, structural risk, and regulatory risk. As a result, there is potential for significant losses to occur.
Certificant Responsibilities
In the event cryptocurrencies and cryptocurrency-related assets are discussed and/or considered as part of a financial plan, Certificants must ensure compliance with the Standards of Professional Responsibility.
Competency
A Certificant is required to develop and maintain the abilities, skills, and knowledge necessary to competently provide professional advice and/or services. Competence requires attaining and maintaining a high level of knowledge and skill, and applying that knowledge effectively in providing professional advice and/or services. As such, if a Certificant wishes to discuss or recommend cryptocurrencies and cryptocurrency-related assets to clients, Certificants must ensure that they obtain the requisite education and competence relating to these assets, including but not limited to taxation. For up-to-date guidance on taxation on cryptocurrencies and cryptocurrency-related assets, please consult the Canada Revenue Agency. Should Certificants not have the requisite competence or experience with cryptocurrencies, they are required to obtain the advice or guidance of an outside professional, such as a Chartered Professional Accountant (CPA) with expertise in cryptocurrency-related assets, or refer their client to another professional with the requisite knowledge, for advice or guidance.
The decentralized nature, lack of regulation, and rapid pace of development mean that the information needed to provide financial planning advice pertinent to cryptocurrencies and cryptocurrency related assets may not be available or may be limited. In situations where a Certificant provides financial planning advice about cryptocurrencies or cryptocurrency-related assets, notwithstanding limited information, the Certificant should inform their client that important information about the asset may not be readily available or may change over time.
Prudent and Appropriate Recommendations
When considering the inclusion of cryptocurrencies and cryptocurrency-related assets in a client’s financial plan, given the high-risk nature of these assets, Certificants must assess each client’s individual risk tolerance and capacity for loss. As a result, cryptocurrencies and cryptocurrency-related assets may not be suitable for all clients. Certificants are reminded to:
✔ Evaluate their client’s goals, risk tolerance, objectives, financial and personal circumstances;
✔ Evaluate their client’s capacity for loss;
✔ Evaluate the suitability of the investment for their client;
✔ Document the rationale for any recommendations by referencing the client’s financial goals, risk profile, and the overall suitability of the recommendations;
✔ Obtain client consent before proceeding and implementing the recommendation.
Certificants must ensure that the client is comfortable with the investment, and ensure that it is prudent and appropriate for their financial circumstances. Specifically, given the high-risk nature of these investments, Certificants should clearly communicate the associated risks to clients and confirm that the clients fully understand them.
Certificants must only implement strategies that are both prudent and appropriate for their client. Guidance within the Standards states that where Certificants recommend exempt or unregulated products such as cryptocurrency or cryptocurrency-related assets to clients, the expectation to conduct appropriate due diligence is heightened.
Estate Planning Considerations
Certificants must be aware of estate planning considerations associated with cryptocurrencies and cryptocurrency-related assets. Considerations include familiarization with the various methods through which a client may hold cryptocurrencies and cryptocurrency-related assets and how they can be tracked. For example:
✔ Client discovery discussions should include a section about digital assets, including but not limited to cryptocurrencies and cryptocurrency-related assets.
✔ Clients should be encouraged to maintain an inventory of their cryptocurrencies and cryptocurrency-related assets.
✔ Clients should be reminded to keep their inventories secure and periodically updated.
✔ Cryptocurrencies and cryptocurrency-related assets should be explicitly outlined in Wills and Powers of Attorney for Property, in accordance with the applicable jurisdiction(s). Unlike traditional assets, cryptocurrency is not recorded in a central system that executors can search.
If the client’s executor does not know which platform, wallet, or service holds the assets, they may not be able to locate them. As such, Certificants should encourage clients to include details regarding where the assets are held and how to access them can help ensure that an executor is able to ensure the intended beneficiaries receive their assets as intended.
Limited Regulatory Requirements
As of the date of this bulletin, the Canadian Deposit Insurance Corporation (CDIC) and Canadian Investor Protection Fund (CIPF) do not provide coverage for cryptocurrencies or cryptocurrency-related assets directly. However, CIPF coverage may apply to investment accounts holding cryptocurrency exposure through instruments such as exchange traded funds (ETFs), subject to applicable limits, but does not protect against losses in the value of the underlying cryptocurrency.
Because of the rapid development and popularization of cryptocurrencies and cryptocurrency-related assets, Certificants must understand the existing regulatory requirements and potential for future regulatory updates. Subsequent developments may also impact a client’s investment(s), including, but not limited to, a decrease in the value of the asset, changes in taxation, reporting, and restriction in the ability to trade the cryptocurrency or cryptocurrency-related asset.
About the FP Canada Standards Council™
A division of FP Canada™, the FP Canada Standards Council™ (the “Standards Council”) establishes and enforces financial planning standards, sets the certification requirements for professional financial planners and develops and delivers certification examinations. The Standards Council ensures that CFP® professionals and QAFP® professionals meet appropriate standards of competence and professionalism through rigorous requirements of education, examination, experience and ethics.
