European Supervisory Authorities Issue Consumer Warning Regarding Cryptocurrency

On Monday, the regulatory trio that makes up the European Supervisory Authorities (ESAs) issued a warning about the financial dangers inherent in virtual currency ownership.

  • Together, the European Securities and Markets Authority (ESMA), European Banking Authority (EBA), and European Insurance and Occupational Pensions Authority (EIOPA) comprise the European Supervisory Authorities (ESAs), one arm of the European system of financial supervision.

    On February 12, 2018, the three ESAs issued a warning to consumers in the European Union about the great risks of purchasing and/or holding 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,” the ESAs wrote. “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 worried that more and more consumers are blindly piling into virtual currencies. The ESAs namechecked cryptocurrencies such as bitcoin (BTC), Ripple (XRP), and Ether (ETH), noting their dramatic price fluctuations during 2017.

    They explained that risks posed by virtual currencies include:

    ·        Extreme volatility and bubble risk;
    ·        Absence of protection;
    ·        Lack of exit options;
    ·        Lack of price transparency;
    ·        Operational disruptions;
    ·        Misleading information; and
    ·        Unsuitability of VCs for most purposes, including investment or retirement planning.

    The ESAs noted that European Union anti-money laundering requirements for wallet providers and virtual currency exchanges will only come into effect later in 2018. For now, the authorities wrote, “VCs remains unregulated under EU law.”

    The authorities spelled this out as clearly as possible:

    “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.”

    BitGrail, an Italian cryptocurrency exchange, recently lost 17 million Nano tokens (market value: $170 million), an event which might have spurred the ESAs’ warning today.

    In November 2017, ETHNews covered the ESMA’s warning about investments in Initial Coin Offerings (ICOs), sometimes referred to as “token offerings.”

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