On February 12, the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA) (collectively the three European Supervisory Authorities (three ESAs)) published a joint warning to consumers relating to the high risks of buying and/or holding virtual currencies (such as Bitcoin, Ether and Ripple).
In their warning, the three ESAs explain that virtual currencies:
- Are a digital representation of value that is not issued or guaranteed by a central bank or public authority;
- Do not have the legal status of currency or money; and
- Are generally not backed by any tangible assets and are unregulated under European Union (EU) law.
The three ESAs also set out the following risks that consumers face when buying virtual currencies or financial products that give consumers direct exposure to virtual currencies:
- Extreme price volatility and clear signs of a pricing bubble, which could result in consumers losing a large amount, or even all, of their money invested in virtual currencies;
- Absence of protection to cover consumers from losses, despite EU anti-money laundering requirements becoming effective later in 2018, which will apply to virtual currency wallet providers and virtual currency exchange platforms;
- Lack of exit options, as there is the risk of not being able to trade virtual currencies or exchange them for traditional currencies, such as the Euro, for long periods of time;
- Lack of price transparency, which could mean that consumers do not receive a fair and accurate price when buying or selling virtual currencies;
- Operational disruptions, such as trading disruptions, leaving consumers unable to buy or sell virtual currencies the moment they intend to;
- Misleading information, which is often incomplete, difficult to understand and does not properly disclose the risks of virtual currencies; and
- Unsuitability of virtual currencies for most purposes, including short-term investments or retirement planning.
The three ESAs advise that if consumers decide to buy virtual currencies or financial products giving exposure to virtual currencies, consumers should fully understand their characteristics and the risks taken. The three ESAs also remind consumers that buying virtual currencies from firms regulated for providing financial services does not mitigate the risks noted above.
The three ESAs’ warning is available here.