Monday, February 12, 2018

WARNING by ESMA for the risks of Virtual Currencies (VCs) ..

Press Release - 12 February 2018  - ESAs warn consumers of risks in buying virtual currencies

WARNING ESMA, EBA and EIOPA warn consumers on the risks of Virtual Currencies 

The European Securities and Markets Authority (ESMA), the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA) (hereafter referred to as ‘the three ESAs’) are warning consumers on the high risks of buying and/or holding so-called Virtual Currencies (VCs). 

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 three ESAs are concerned by the fact that an increasing number of consumers buy VCs particularly with the expectation that the value of VCs will continue to grow but without being aware of the high risk of losing their money invested. 

VCs such as Bitcoin, Ripple, Ether and many others have been highly volatile of late, meaning that there have been significant daily fluctuations in their prices. For example, the value of Bitcoin increased sharply in 2017 from around €1,000 in January to over €16,000 in midDecember and then fell almost 70% to €5,000 in early February. It has more recently recovered some 40% from the low, and is currently trading at around €7,000. The total market capitalisation of the 100 largest VCs is said to exceed the equivalent of €330 billion globally today. 

Why is it risky for consumers to buy VCs? 

The three ESAs warn consumers that VCs can be extremely risky and are usually highly speculative. If you buy VCs, you should be aware that there is a high risk that you will lose a large amount, or even all, of the money invested. When buying VCs, or financial products giving consumers direct exposure to VCs, you are exposed to a number of risks, including the following:

- 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. 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.

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