Crypto assets are broadly defined as digital representations of value or rights that may be transferred and stored electronically, using distributed ledger technology or similar technology.
This warning seems to echo the sentiments and concerns of other regulators, such as MAS and the UK FCA, due to growing consumer activity and interest in crypto assets. In addition to the aggressive promotion of these assets and related products to the public, including through social media.
The ESAs warning highlighted that these assets are not suited for most retail consumers as an investment or as a means of payment or exchange because these customers:
- face the very real possibility of losing all their invested money if they buy these assets.
- may not be alert to the risks of misleading advertisements, including those via social media and influencers.
- may make investment decisions based on promised fast or high returns, especially those that look too good to be true.
Consumers may not fully understand the various types of crypto-assets and that there may be a lack of recourse or protection available to them, as crypto-assets and related products and services typically fall outside of existing protection under current EU financial services rules.
As of today, 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 warning provided a summary of the key risks to which consumers would be exposed in respect of crypto assets:
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Extreme price movements |
Many crypto assets are subject to sudden and extreme price movements and are speculative because their prices often depend solely on consumer demand (i.e., there may be no backing assets or other tangible value). |
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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, particularly on social media, where ads are short and may only focus on returns and not risks. |
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Absence of protection |
The majority of crypto assets and the selling of products or services in relation to crypto-assets is unregulated in the EU. Therefore, rights and protections may not be available in the same way they are for regulated financial services. |
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Product complexity |
Some products providing exposure to crypto assets are very complex, sometimes with features that can increase the magnitude of losses in the event of adverse price movements. These products, given their complexity, are not suitable for many consumers. |
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Fraud and malicious activities |
Numerous fake crypto assets and scams exist that consumers can fall victim to. |
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Market manipulation |
Lack of price transparency and low liquidity: how crypto asset 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. |
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Hacks, operational risks, and security issues |
The distributed ledger technology underpinning crypto assets can bear specific risks. Several issuers and service providers of crypto assets, including crypto exchanges and wallet providers, have experienced cyber-attacks and severe operational problems. |
Russia, Belarus and Crypto Assets
In relation to the current situation in Ukraine, the implementation of sanctions and potential restrictive measures have been imposed against Russian and Belarusian entities and individuals with regards to crypto assets. This is due to other jurisdictions seeing an influx of requests to convert crypto assets into fiat or shift them into real estate to circumvent sanctions.
ESG and Crypto
Another observation noted in the ESA warning, and in line with earlier observations raised by the EU, relates to the extremely high level of energy consumption of some crypto assets, specifically from mining and validation processes. Consumers are reminded to also be aware of their environmental impact.
