Specific Risks of Crypto-assets and Related Products and Services
Most financial consumers lose money in crypto-assets due to several factors. Consumer protection schemes have not yet been designed very well. Cryptoassets are not fully regulated by authorities. Unlike legal tender, there is no government insurance in any cryptocurrencies. Cryptoassets trade in the highly volatile market environment. Several authorities warn consumers about the risks of crypto-assets.
EU financial regulators (The European Supervisory Authorities including EBA, ESMA and EIOPA) specify the key risks:
- 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 cryptoassets 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. Cases of market manipulation have been reported on multiple occasions.
- 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.
Last year, FCA warned consumers of the risks of investments advertising high returns based on cryptoassets. FCA pointed out the risk as follow:
- Consumer protection: Some investments advertising high returns based on cryptoassets may not be subject to regulation beyond anti-money laundering requirements.
- Price volatility: Significant price volatility in cryptoassets, combined with the inherent difficulties of valuing cryptoassets reliably, places consumers at a high risk of losses.
- Product complexity: The complexity of some products and services relating to cryptoassets can make it hard for consumers to understand the risks. There is no guarantee that cryptoassets can be converted back into cash. Converting a cryptoasset back to cash depends on demand and supply existing in the market.
- Charges and fees: Consumers should consider the impact of fees and charges on their investment which may be more than those for regulated investment products.
- Marketing materials: Firms may overstate the returns of products or understate the risks involved.