What has happened?
Three European regulators have warned investors about the risks associated with dealing with virtual currencies, saying they are unsuitable "for most purposes, including investment and retirement planning".
What does this mean?
The European Securities and Markets Authority, the European Banking Authority and the European Insurance and Occupational Pensions Authority have joined together to express their concern over the fact that an increasing number of consumers are buying virtual currencies without being aware of the "high risk" of losing their money.
“The [virtual currencies] 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 regulators cautioned in a statement.
“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 regulators outlined multiple risks associated with virtual currencies, such as the absence of protection or the lack of exit options and transparency.
They even went as far as saying there was a "bubble risk" as most virtual currencies are subject to high price volatility, warning consumers that they could therefore lose all their investment.
For example, bitcoin, the best known cryptocurrency, rose from around €1,000 in January 2017 to over €16,000 in mid-December, before falling almost 70% to €5,000 early this month.
Virtual currencies are also often subject to operational disruptions, during which consumers cannot buy or sell their currencies when they want to, meaning they can suffer losses owing to the price fluctuation during the period of disruption.
Information for consumers who wish to buy virtual currencies is also in “most cases incomplete, difficult to understand, does not properly disclose the risks of virtual currencies and may therefore be misleading”.
The statement also offers some advice to investors.
“If you decide to buy VCs or financial products giving direct exposure to VCs, you should fully understand their characteristics and the risks you take. You should not invest money you cannot afford to lose.”
The warning was requested by European Commission Vice-President Valdis Dombrovskis, who had written to the three watchdogs in December 2017 to ask them to update their warnings on the risks of investing in virtual currencies.
The warning comes as at a time of heightened scrutiny over virtual currencies.
Recently, the United Arab Emirates joined the ever-expanding list of countries to warn against cryptocurrencies and initial coin offerings.
In the US, regulators are showing signs to be working closer with Congress, in the belief that they should work together to address market and regulatory gaps.
Further, the managing director of the International Monetary Fund, Christine Lagarde, also said in a recent CNN interview that international regulatory action was "inevitable".
"It's clearly a domain where we need international regulation and proper supervision," she said.
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