The European Supervisory Authorities (ESAs), including the ESMA, EBA, and EIOPA have issued a pan-EU warning to consumers regarding the risks of buying cryptocurrencies.
The ESAs are concerned that consumers are buying virtual currencies or “VCs” oblivious to the intrinsic risk including heightened volatility and the fact these vehicles are non regulated products, typically traded on non regulated exchanges. Consumers buying cryptocurrencies such as Bitcoin do not benefit from any protection associated with regulated financial services. The warning comes at a time when numerous exchanges around the world have reported thefts due to illicit attacks on their platforms.
The ESA bulleted out the list of risks for retail invesotrs:
- Extreme volatility and bubble risk – Most VCs are subject to extreme price volatility and have shown clear signs of a pricing bubble. If you decide to buy VCs or financial products with VCs as underlying, you should be aware that you could lose a large amount, or even all, of the money invested.
- Lack of price transparency – The price formation of VCs is often not transparent. There is therefore a high risk that you will not receive a fair and accurate price when buying or selling VCs.
- Operational disruptions – Some VC exchanges have suffered severe operational problems, such as trading disruptions. During these disruptions, consumers have been unable to buy and sell VCs at the moment they intended to and have suffered losses due to the price fluctuation of VCs held during the period of disruption.
- Misleading information – The information made available to consumers wishing to buy VCs, where such information is at all provided, is in most cases incomplete, difficult to understand, does not properly disclose the risks of VCs and may therefore be misleading.
- Unsuitability of VCs for most purposes, including investment or retirement planning – The high volatility of VCs, the uncertainty about their future and the unreliability of the VC exchange platforms and wallet providers makes VCs unsuitable for most consumers, including those with a short-term investment horizon, and especially those pursuing long-term goals like saving for retirement.
- Absence of protection – Despite EU anti-money laundering requirements that will enter into force later in 2018 and which will become applicable to wallet providers and VCs exchange platforms, VCs remain unregulated under EU law. Similarly, exchanges where VCs are traded and digital wallets used to hold, store and transfer VCs are unregulated under EU law, too. This means, that if you buy or hold VCs, you will not benefit from the guarantees and safeguards associated with regulated financial services. For example, if a VC exchange platform or a digital wallet provider fails, goes out of business, or is subject to a cyber-attack, funds embezzlement or asset forfeiture as a result of law enforcement actions, EU law does not offer any specific legal protection that would cover you from losses or any guarantee that you will regain access to your VCs holdings. These risks have already materialised on numerous occasions around the world.
- Lack of exit options – If you decide to buy VCs, you are at risk of not being able to trade your VCs or to exchange them for traditional currencies, such as the Euro, for a long period of time. You may therefore suffer losses in the process
The warning on virtual currencies is based on Article 9(3) of the three ESAs’ founding Regulations and follows the publication of two statements by ESMA on Initial Coin Offerings in November 2017 and an earlier Warning to consumers and two Opinions on VCs published by EBA in December 2013, July 2014 and August 2016, respectively.