ESA Issues Regulators’ Warning on the Digital Coin Pricing Bubble to Investors
On 12th February 2018, the EU Markets Watchdog issued a statement warning investors of investing in virtual currencies stating that, “these currencies have shown clear signs of a pricing bubble.”
The statement comes from the European Supervisory Authorities (ESA) that includes the ESMA (securities), the EBA (banking) and the EIOPA.
Following the warning, Valdis Dombrovskis, the vice president of the EU commission, tweeted that he welcomed the statement and mentioned that he has been warning investors of the “high risks” of cryptocurrencies since December.
This is not the first time a warning against virtual currency investing has been made. The London-based EBA published a similar statement around four years back and warned people that they could lose all their investments when trading in cryptocurrencies.
The current statement was made after considerable spikes in the price of Bitcoins during last week. It’s to be noted that the online trading price of Bitcoins is on a downward path since December. It averaged around $20,000 in December. Currently, the prices have dropped sharply and ranged just below $8000 in the first week of February.
The ESA is concerned that increasing number of investors, mostly amateurs are purchasing cryptocurrencies without being aware of the risk involved. Cryptocurrencies shot to fame in the last few years and have shown extremely volatile pricing in the last few months. The ESA warns that this is apparently a sign of pricing bubble and investors trading with cryptocurrencies should be aware of the high risks involved. They could end up losing a significant portion of their investments or even all of it in worst cases.
Cryptocurrencies remain Non-regulated
Unlike regulated financial services that are protected by the EU laws, investors buying cryptocurrencies are not protected. This means, for instance, if a cryptocurrency exchange fails and goes out of business, or customers lose their cryptocurrencies due to cyber attacks, there is no way that they can turn to the law for any help. It means that there is no possible way for the investors to recover their losses.
Operational Issues abound at Virtual Currency Exchanges
During the last year, online cryptocurrency exchanges (an online site where investors buy/sell/trade cryptocurrencies) have been subjected to several operational problems. When an exchange faced such an issue, investors were unable to sell or buy. This has led to price fluctuations, leading to losses for investors.
Virtual currencies were first introduced in 2009 and Bitcoin was the first such currency to be launched in the market. Today, there are plenty of digital currencies like Ripple, Dash, Ethereum, Litecoins and so on. Digital currencies work on the principle of a distributed ledger, commonly known as the blockchain.
The warning from ESA is based on the Article 9(3) of the founding Regulations of the ESA. Apart from the recent statement, the ESA had issued several other statements regarding digital currencies earlier. One was on Initial Coin Offerings by the ESMA (November 2017). Others include opinions on virtual currencies by the EBA in July 2014 and August 2016.
ESMA faces mounting pressure to regulate the usage of digital currencies in Europe, and the issue is likely to be discussed at the upcoming G20 meeting.
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