The ESAs (ESMA, EBA + EIOPA) warn consumers about cryptocurrencies

ESMA
ESMA

The European Securities and Markets Authority (ESMA), the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA) (the ‘ESAs’) are together warning consumers on the high risks of buying and/or holding cryptocurrencies – what the ESAs call Virtual Currencies (VCs). This continues from an earlier ESMA warning about ICOs.

In their view “the VCs currently available are a digital representation of value that is neither issued nor guaranteed by a central bank or public authority and does not have the legal status of currency or money. They are highly risky, generally not backed by any tangible assets and unregulated under EU law, and do not, therefore, offer any legal protection to consumers.

The ESAs worry that an increasing number of consumers:

  • buy VCs with the expectation that the value of VCs will continue to grow
  • fail to recognise the high risk of losing their money invested.

VCs and volatility

VCs such as Bitcoin, Ripple, Ether and many others have been highly volatile of late, meaning
that there are significant daily fluctuations in prices. For example, the value of
Bitcoin:

  • increased sharply – from around €1,000 in January to over €16,000 in mid December 2017
  • fell almost 70%, to €5,000, by early February, 2018
  • recovered, more recently, by some 40% from its 2018 low (it is currently trading at around €7,000).

 

According to the ESA, the total market capitalisation of the 100 largest VCs is said to exceed €330 billion globally. That compares to (say) the Euronext total value which is some €3379 billion today.

VC risks

The ESAs summarise the risks as:

  • “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
  • “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. …
  • “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
  • “lack of price transparency – the price formation of VCs is often not transparent (and so) 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.”

What does this mean

If it was not already clear, as the ESAs warn, dealing in cryptocurrencies (Virtual Currencies in ESA-speak) is akin to gambling. This applies as much to enterprises as to individuals.

Indeed, while the pain of losing your hard earned savings is acute, the agonies that will eventually emerge from the corporate world will be worse. While one can hope that few or none burnt their corporate fingers by playing the cryptocurrency game, it is almost certain that when accounts have to appear they will show some shocking losses. From March through April may deliver some agonies.

Enterprises are not immune from the temptation to seek a quick buck!

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