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EU Financial Regulator warn consumers on the risks of the crypto-assets

On 17 March 2022 the European Supervisory Authorities (EBA, ESMA and EIOPA – the ESAs) published a warning in order to notify consumers of the high risks and the speculative factors of the crypto-assets. The warning is based on Article 9 (3) of the founding Regulations of the ESAs. The ESAs intended to provide key steps that consumers can take to ensure they make informed decisions.

This warning came in the context because of the growing consumer activity and interest in crypto-assets and the aggressive promotion of those assets and the related products to the public, including through social media. At the date of the warning, there have been more than 17,000 different crypto-assets, some of them being sometimes referred to as so-called ‘virtual currencies’ or digital ‘coins’ or ‘tokens’. ESAs are concerned that an increasing number of consumers are buying those assets with the expectation that they will earn a good return, without realising the high risks involved.

In their warning, the ESAs highlighted the extreme price movements as one of the risks of the crypto-assets. Many crypto-assets are subject to sudden and extreme price movements and are speculative, since their price often relies solely on consumer demand (i.e. there may be no backing assets or other tangible value). Consumers 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, or as a means of exchange or payment.

The warning also concluded that consumers shall be alert to the risks of misleading advertisements, including via social media and influencers. For instance, advertisements via social media may be very short, with a focus on the potential gains but not the high risks involved. Consumers 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.

Furthermore, ESAs highlighted the problem of market manipulation, lack of price transparency and low liquidity as a risk of these assets. The holding of certain crypto-assets is also highly concentrated, which may impact prices or liquidity. Consumers may therefore not get a fair price or treatment when buying or selling crypto-assets, or not be able to sell crypto-assets as quickly as they would want in the absence of a potential buyer. On the other hand, the ESAs also warned consumers that they should be aware of the lack of recourse or protection available to them, as crypto-assets and related products and services typically fall outside existing protection under current EU financial services rules.

In September 2020 the European Commission presented a legislative proposal for a regulation on markets in crypto-assets that would provide a comprehensive framework for the regulation and supervision of issuers and providers of services for crypto-assets with a view to protect consumers and the integrity and stability of the financial system. Consumers are however reminded that the proposal remains subject to the outcome of the legislative process and consumers will not currently benefit from any of the safeguards foreseen in that proposal until it is adopted and applies.