Over the past few years, an increasing number of people have become significantly more interested in investing in cryptocurrencies. For example, according to the Crypto Market Sizing Report 2021 and 2022 Forecast, a report by one of the leading cryptocurrency exchanges in the world, only in 2021, the number of people who own cryptocurrencies has increased from 106 million in January to 295 million in December 2021. This tremendous increase is, to a great extent, due to the belief, of customers and newcome investors, that they can easily multiply their assets by acquiring volatile cryptocurrencies with a low initial value, predicting that their value will subsequently skyrocket. In addition, the perception of these customers is often fuelled by the aggressive marketing campaigns that some cryptocurrency exchanges use to attract new clients, promising overwhelming profits. Meanwhile, some of these campaigns comfortably avoid mentioning the high risk inevitably related to cryptocurrency investing.
Unfortunately, it turns out that, in reality, a significant number of the people who are buying cryptocurrencies are not sufficiently informed of the potential risk that arises within the process of investing in such. Hence, in 2022, three European Supervisory Authorities, including the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA), issued a joint warning to the customers, reminding them that investing in cryptocurrencies poses a high risk of losing their assets. The warning also provides information regarding the potential risks when investing in cryptocurrencies, such as misleading information consisting in “aggressively advertising of products and services, as well as in presenting of unclear, incomplete, inaccurate or even purposefully misleading information.”
Another potential risk roots in the fact that the assets invested by the customers are not secured with respect to possible cases of their loss due to reasons attributable to the respective trading platform, which is a custodian of their wallets. The most noteworthy example of such a recent loss of customer assets is the collapse of the FTX exchange, recently the third-biggest cryptocurrency trading platform, which recently filed documents for bankruptcy. The platform’s bankruptcy has left nearly one million creditors, almost all of which customers, to curse the day they decided to invest in it. Moreover, there is information saying that the owners of the exchange have used customer deposits amounting to over 10 billion BGN to bolster the platform, with over one billion of them subsequently went missing.
Needless to say, like many of the widely promoted “opportunities” that promise gravy, cryptocurrencies are also very popular among the youth. Thus, according to a study conducted by Pew Research Center, 43 per cent of the U.S. males between the age of 18 and 29 state that they have traded, used or invested in cryptocurrency at least one time. At the same time, the risks for young people who invest in cryptocurrencies are not only decreasing, but even increasing, while it’s worth to be noted that the most famous cryptocurrency “bitcoin” has suffered a significant devaluation over the past year (from nearly BGN 88,000 for 1 bitcoin in December 2021 to just over BGN 30,000 in early December 2022). Amid this extreme volatility, at the end of November 2022, the European Central Bank (ECB) has published an article called “Bitcoin’s last stand”, claiming that the cryptocurrency has no future as its value is based solely on speculation.
In addition, as already mentioned, it should be noted that at the moment, there is no obligation for cryptocurrency exchange platforms to secure the assets of their customers up to a certain amount, to meet specific capital requirements or to have insurance covering the risks related to asset loss. An obligation to comply with such prudential requirements is envisaged in the Regulation on Markets in Crypto-assets, and amending Directive (EU) 2019/1937 (referred to as the “MiCA Regulation”), the final text of which was adopted in October 2022 by the European Parliament’s Committee on Economic and Monetary Affairs (ECON). However, most of its provisions will only apply from the beginning of 2024. The latter introduces multiple obligations, the compliance of which shall be guaranteed not only by the crypto-asset trading platforms but by all “crypto-asset service providers”, including the persons that only provide an exchange of crypto-assets for other crypto-assets, persons providing advice on crypto-assets and others.
In conclusion, while the flooding information flow often encourages us to invest in high-risk virtual assets such as cryptocurrencies, it is safe to say that at the very moment missing this opportunity might be beneficial for our financial situation. This is particularly applicable in case we are not well aware of the potential risk that “lurks” around every corner in the virtual world of decentralised finance.
