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Warning to Consumers on Virtual Currency Risks Issued by EBA, EIOPA and ESMA

On February 12, the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA) (collectively the three European Supervisory Authorities (three ESAs)) published a joint warning to consumers relating to the high risks of buying and/or holding virtual currencies (such as Bitcoin, Ether and Ripple).

In their warning, the three ESAs explain that virtual currencies:

  • Are a digital representation of value that is not issued or guaranteed by a central bank or public authority;
  • Do not have the legal status of currency or money; and
  • Are generally not backed by any tangible assets and are unregulated under European Union (EU) law.

The three ESAs also set out the following risks that consumers face when buying virtual currencies or financial products that give consumers direct exposure to virtual currencies:

  • Extreme price volatility and clear signs of a pricing bubble, which could result in consumers losing a large amount, or even all, of their money invested in virtual currencies;
  • Absence of protection to cover consumers from losses, despite EU anti-money laundering requirements becoming effective later in 2018, which will apply to virtual currency wallet providers and virtual currency exchange platforms;
  • Lack of exit options, as there is the risk of not being able to trade virtual currencies or exchange them for traditional currencies, such as the Euro, for long periods of time;
  • Lack of price transparency, which could mean that consumers do not receive a fair and accurate price when buying or selling virtual currencies;
  • Operational disruptions, such as trading disruptions, leaving consumers unable to buy or sell virtual currencies the moment they intend to;
  • Misleading information, which is often incomplete, difficult to understand and does not properly disclose the risks of virtual currencies; and
  • Unsuitability of virtual currencies for most purposes, including short-term investments or retirement planning.

The three ESAs advise that if consumers decide to buy virtual currencies or financial products giving exposure to virtual currencies, consumers should fully understand their characteristics and the risks taken. The three ESAs also remind consumers that buying virtual currencies from firms regulated for providing financial services does not mitigate the risks noted above.

The three ESAs’ warning is available here.

©2018 Katten Muchin Rosenman LLP

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About this Author

Carolyn H. Jackson, International Attorney, Katten Muchin law firm
Partner

Carolyn Jackson is a partner in Katten Muchin Rosenman UK LLP and is a Registered Foreign Lawyer. She provides US financial regulatory legal advice to a broad range of market participants, including commercial banks, investment banks, investment managers, broker-dealers, electronic trading platforms, clearinghouses, trade associations and over-the-counter derivatives service providers.

Carolyn guides clients in the structuring and offering of complex securities, commodities and derivatives transactions and in complying with US securities and commodities laws...

+44 0 20 7776 7625
Nathaniel Lalone, Katten Muchin Law Firm, Financial Institutions Attorney
Senior Associate

Nathaniel Lalone, a partner at Katten Muchin Rosenman UK LLP, has a broad range of experience in the regulation of financial products and financial markets, and frequently provides regulatory and compliance advice to trading venues, clearing houses and buy-side firms active in the over-the-counter (OTC) derivatives, futures and securities markets. He is actively involved in advising clients on the implementation of MiFID 2 and MiFIR in the European Union as well as the international reach of US financial services regulation. He also has significant experience with structuring and documentation relating to OTC derivatives and structured products.

Prior to joining Katten, Nathaniel was a member of the US Regulatory and the Derivatives and Structured Finance practices at Allen & Overy LLP.

+44 0 20 7776 7629
Neil Robson, private equity fund managers counselor, Katten Law Firm, London
Partner

Neil Robson, a regulatory and compliance partner with Katten Muchin Rosenman LLP, focuses his practice on counseling hedge and private equity fund managers and other investment advisers on operational, regulatory and compliance issues. He regularly addresses Financial Conduct Authority (FCA) and EU authorization and compliance under both the EU Alternative Investment Fund Managers Directive (AIFM Directive) and MiFID, cross-border issues in the financial services sector, market abuse, anti-money laundering and regulatory capital requirements, formations and buyouts of...

44-0-20-7776-7666