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Consob Communication on
ESMA, EBA and EIOPA warn consumers about the risks of cryptocurrencies
The European Securities and Markets Authority (ESMA), the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA) (collectively the “three European Supervisory Authorities”) ), warn consumers about the risks associated with the purchase and / or holding of so-called cryptocurrencies.
The cryptocurrencies currently available are a digital representation of value, they are neither issued nor guaranteed by central banks or other public authorities and do not have the legal status of currency or money.
They are instruments at high risk and generally are not guaranteed by tangible assets nor are they regulated by European Union legislation.
They therefore do not offer any legal protection to consumers.
The three European Supervisory Authorities consider the increase in the number of investors who purchase cryptocurrencies is worrying, often with the expectation of seeing them continually increasing their value, without however being aware of the high risk of losing the money invested.
Cryptocurrencies such as Bitcoin, Ripple, Ether and many others have recently shown high volatility, with marked daily fluctuations in price.
For example, the value of Bitcoin has risen sharply in 2017, from around € 1,000 in January to over € 16,000 in mid-December, before falling to € 5,000 at the beginning of February, down by almost 70%.
Bitcoin has recently recovered around 40% of the lows and is currently trading around € 7,000.
It is estimated that the total market capitalization of the hundred major cryptocurrencies has now surpassed, globally, the equivalent of € 330 billion.
Why is the purchase of cryptocurrencies a risk for consumers?
The three European Supervisory Authorities warn consumers that cryptocurrencies can be extremely risky and are usually highly speculative.
Those who buy virtual currency must be aware of the risk of losing much of the money invested, or even of losing it completely.
The consumer who purchases cryptocurrencies or financial products with direct exposure to cryptocurrencies is exposed to a number of risks, due in particular to the following factors:
extreme volatility and speculative bubble risk: the majority of cryptocurrencies are extremely volatile in price and have shown clear signs of speculative bubble.
Those who decide to buy cryptocurrencies or financial products that have a cryptocurrency as their underlying must be aware of the risk of losing most of the money invested, or even of losing it completely.
absence of safeguards: despite EU anti-money laundering requirements, which will enter into force in 2018 and apply to digital wallet providers to cryptocurrency trading platforms, virtual currencies are not regulated by EU legislation and, similarly, neither are their negotiation nor the digital portfolios used to hold them, store them and transfer them.
This means that those who buy and hold cryptocurrencies do not benefit from any of the guarantees and safeguards normally associated with regulated financial services.
For example, if a platform for the negotiation of cryptocurrencies or a digital portfolio provider fails, ceases activity, is the victim of an IT attack, is accused of embezzlement of funds or is subject to confiscation of assets as a counter-measure, EU legislation does not provide any specific legal protection to cover the losses incurred by the investor, nor does it offer any guarantee that it will be able to access its cryptocurrency reserves again. These risks have already manifested themselves concretely on several occasions, all over the world.
no exit option: by deciding to buy cryptocurrency you are exposed to the risk of not being able to negotiate or exchange with conventional currencies such as the euro for long periods, with the possibility of consequent losses.
no price transparency: cryptocurrency price formation processes are often not transparent. There is therefore a high risk that prices will not be fair or accurate when buying cryptocurrencies.
disruption of operations: on some platforms for the cryptocurrency negotiation there were serious drawbacks, such as interruptions in operations, which prevented consumers from buying and selling cryptocurrency at the moment they deemed appropriate, exposing them to losses due to price fluctuations in cryptocurrencies held by them during the period of interruption of operations.
misleading information: the information provided to consumers willing to purchase cryptocurrency, even when made available, are in most cases incomplete and difficult to understand and do not effectively reveal the risks inherent in cryptocurrencies: such information may therefore be misleading.
inadequacy of cryptocurrencies for the majority of loans, including investments and pension plans: the high volatility of virtual currencies, the uncertainty of their future and the unreliability of trading platforms and digital portfolios make them inadequate for the majority of consumers, including those with short-term investment horizons and, in particular, those with long-term objectives such as retirement savings.
How to protect yourself?
It is absolutely necessary that those who decide to buy cryptocurrencies or financial products with direct exposure to cryptocurrencies fully understand the characteristics of what they buy and the risks to which they are exposed.
Never invest what you can not afford to lose. It is essential to ensure that adequate safety precautions are taken, keeping them duly updated, to protect the IT devices that are used to access their cryptocurrency, to purchase it, store it and transfer it. It is also essential to be aware that buying cryptocurrency from regulated financial services firms does not mitigate the risks described above.
Basic information
This notice is based on Article 9 of the founding regulations of the three European Supervisory Authorities; follows the publication of two ESMA statements on Initial Coin Offerings in November 2017 and a previous notice to consumers and two opinions on cryptocurrencies published by EBA in December 2013, July 2014 and August 2016.
Virtual currencies are available in different forms. The first cryptocurrency was Bitcoin, launched in 2009. Since then many others have been born, including Ripple, Ether and Litecoin.
The majority rely on Distributed Ledger Technology, commonly called “Blockchain” .
This notice does not constitute judgment on this technology nor on its possible applications.
March 09, 2018
Source Consob
