Yesterday, the three European Supervisory Authorities regarding securities (ESMA), banking (EBA) and insurance and pensions (EIOPA) published an EU-wide warning to consumers about the risks of Virtual Currencies (VCs) or so-called crypto currencies such as Bitcoin, Ripple or Ether. While an increasing number of consumers are buying VCs, they are hardly aware of the associated risks. Since VCs present highly risky and unregulated products, they are unsuitable as investment, savings or retirement planning products.
These are the key risks:
Extreme volatility and bubble risk: Most of these currencies exhibit extreme price volatility and clear signs of a speculative bubble. Purchasing VCs or financial products with VCs as underlying could lead to large-scale or even total losses of the money invested.
Lack of consumer protection: VCs remain unregulated under EU law, even though the EU anti-money laundering requirements, which will come ´into force in the course of 2018, will also apply to wallet providers as well as VCs exchange platforms. Moreover, exchange platforms are not regulated and any related transactions are excluded from guarantees and safeguards associated with regulated financial services.
Misleading information: Product information for consumers who seek to buy VCs is often incomplete, difficult to understand, does not properly disclose the risks of VCs and may therefore be misleading – if such information is provided at all.
Lack of price transparency: The price formation of VCs is often times non-transparent, which is why there is a high risk attached to buying or selling VCs as to not obtaining fair and accurate prices.
Source: European Banking Authority