The European Supervisory Authorities (EBA, ESMA and EIOPA – the ESAs) today issued a warning to consumers about crypto-assets. These are not suited for most retail consumers as an investment or as a means of payment or exchange, the regulators say.
Consumers face the very real possibility of losing all their invested money if they buy these assets. Consumers should be alert to the risks of misleading advertisements, including via social media and influencers. Consumers should be particularly wary of promised fast or high returns, especially those that look too good to be true.
The key risks include:
- Extreme price movements: many crypto-assets are subject to sudden and extreme price movements and are speculative, because their price often relies solely on consumer demand (i.e., there may be no backing assets or other tangible value). You may lose a large amount or even all of the money invested. The extreme price movements also mean that many crypto-assets are unsuitable as a store of value, and as a means of exchange or payment;
- Misleading information: some crypto-assets and related products are aggressively advertised to the public, using marketing material and other information that may be unclear, incomplete, inaccurate or even purposefully misleading. For instance, advertisements via social media may be very short, with a focus on the potential gains but not the high risks involved. You should also beware of social media ‘influencers’ who typically have a financial incentive to market certain crypto-assets and related products and services and therefore may be biased in the communications they issue;
- Absence of protection: the majority of crypto-assets and the selling of products or services in relation to crypto-assets are unregulated in the EU. In these cases you will not benefit from the rights and protections available to consumers for regulated financial services, such as complaints or recourse mechanisms;
- Product complexity: some products providing exposure to crypto-assets are very complex, sometimes with features that can increase the magnitude of losses in case of adverse price movements. These products, given their complexity, are not suitable for many consumers;
- Fraud and malicious activities: numerous fake crypto-assets and scams exist and you should be aware that their sole purpose is to deprive you of your money using different techniques, for example phishing;
- Market manipulation, lack of price transparency and low liquidity: how crypto- assets prices are determined and the execution of transactions at exchanges is often not transparent. The holding of certain crypto-assets is also highly concentrated, which may impact prices or liquidity. You may therefore not get a fair price or treatment when buying or selling crypto-assets, or not be able to sell your crypto-assets as quickly as you would want in the absence of a potential buyer. Cases of market manipulation have been reported on multiple occasions; and
- Hacks, operational risks and security issues: the distributed ledger technology underpinning crypto-assets can bear specific risks. Several issuers and service providers for crypto-assets, including crypto exchanges and wallet providers, have experienced cyber-attacks and severe operational problems. Many consumers have lost their crypto-assets or suffered losses due to such hacks and disruptions or because they have lost the private keys providing access to their assets.
As at the date of this warning, there are more than 17,000 different crypto-assets, some of them being sometimes referred to as so-called ‘virtual currencies’ or digital ‘coins’ or ‘tokens’. The most prominent crypto-assets to-date include bitcoin and ether, which together represent about 60% of the total market capitalisation of crypto-assets. The energy consumption of some crypto-assets is high, e.g., from mining and validation processes, and consumers should be aware of their environmental impact.