What has happened?
The market watchdog of Luxembourg has become the latest regulator to ring the alarm bell about the "substantial risks" linked to virtual currencies and initial coin offerings (ICOs).
What does this mean?
The Commission de Surveillance du Secteur Financier (CSSF) of Luxembourg has warned investors against the dangers of cryptocurrencies and ICOs.
On virtual currencies, the CSSF said that, currently, there is no uniform definition of virtual currencies, either at national or European level.
The regulator explained that virtual currencies are not backed by a central bank and their value is not guaranteed.
It also warned about the absence of investor protection, which can lead to the loss of the entire investment, and the risk of theft as cryptocurrency platforms are often vulnerable to being hacked.
Many virtual currency platforms are also unstable, which means that virtual currency holders can be prevented from trading when they want to and suffer losses owing to value fluctuations while the platform is not performing as expected.
In addition, the CSSF highlighted the risk of volatility and bubble effect and the lack of transparency in respect of fees and price calculations.
Further, the regulator added that information on virtual currencies is "often incomplete, difficult to understand or does not reflect all the risks linked to virtual currencies".
The lack of regulation also means that virtual currencies attract fraudsters and can be used in illegal activities such as money laundering, terrorism financing and ransomware.
The warning about ICOs is similar to the one on virtual currencies and covers the same points, but the CSSF also noted that the ICO model lacks verifiable information about the tokens created and the money collected.
The CSSF urged investors to exercise caution and to run a series of checks on ICO providers to ensure they are legitimate businesses, including checking the Registre de Commerce et des Sociétés de Luxembourg, which is the equivalent of Companies House in the UK.
The regulator stressed, however, that neither warning concerned blockchain, the technology underlying virtual currencies and ICOs, as this "can bring advantages through its use in certain areas of the financial sector and in various innovative projects".
The CSSF is only the latest regulator that has cautioned investors against the risks of virtual currencies.
An ever-increasing list of national and international watchdogs includes the regulators of Germany, Nigeria, France, the United Arab Emirates as well as the European Securities and Markets Authority, the European Banking Authority and the European Insurance and Occupational Pensions Authority, which joined forces last month to issue a similar warning.
If you want to take advantage of blockchain's huge potential and disruptive impact, while avoiding falling foul of ever-developing regulatory and legal requirements, visit our Hogan Lovells Engage Blockchain Toolkit.