Cryptocurrencies are the hot asset. It seems evident that the covid-19 crisis and the digitization of the economies are giving a boost to these crypto assets, which do not stop as their investment becomes more widespread. Some, like bitcoin, already have a place in several of the most powerful investment portfolios in the world. Despite everything, regulators insist on the dangers hidden behind the tangle of positive news and new price records: they are a high-risk investment and have no regulatory framework in the EU.
In a joint statement, the National Securities Market Commission (CNMV) and the Bank of Spain (BdE) have warned investors about the high risk involved in investing in cryptocurrencies. In addition, regulators have also wanted to question whether cryptocurrencies such as bitcoin can become a widespread means of payment (not even with the support of a central bank). This message comes just hours after Tesla has announced that it will invest 1.5 billion in bitcoin and that it will accept it as a means of payment, which has led several of these crypto assets to reach all-time highs.
The Spanish regulators have given names and surnames in a statement in which they review all these risks. “In recent months, many cryptocurrencies, including , have experienced high price volatility, which has been accompanied by a significant increase in advertising, sometimes aggressive, to attract investors,” the statement said.
Cryptocurrencies, although they were born with the idea of replacing the official money issued by central banks, still do not fulfill the key functions to achieve it and, in addition, they suffer from other problems that make them too risky an asset.
The Bank of Spain and the CNMV have already warned in the past about the risk of this type of investment due to its extreme volatility, complexity and lack of transparency that make it a high-risk bet.
“There is no regulation in the EU”
In addition, the CNMV and the BdE emphasize that “there is still no framework in the European Union that regulates crypto assets such as bitcoin, and that provides guarantees and protection similar to those applicable to financial products.” Although they acknowledge that a Regulation (known as MiCA) is being negotiated at the European level, which aims to establish a regulatory framework for the issuance of crypto assets and service providers on them.
According to the most widespread calculations, it is estimated that there are some 7,000 cryptocurrencies on the market with characteristics similar to those of bitcoin. “These are complex instruments, which may not be suitable for small savers, and whose price entails a high speculative component that can even mean the total loss of the investment.”
Five major risks inherent in investing in crypto assets
-Price formation: the prices of cryptocurrencies are formed in the absence of effective mechanisms that prevent their manipulation, such as those present in regulated securities markets. On many occasions, prices are also formed without public information to support them, reads the BdE and CNMV statement.
-Liquidity: many of these are necessary to be able to undo an investment without suffering significant losses, especially since its circulation among investors, both retail and professional, is very limited.
-Use as a means of payment: despite the fact that they have existed for more than a decade, the acceptance of cryptocurrencies as a means of payment is still very limited, which contrasts with many other digital developments that have had widespread acceptance in much less time. . It is necessary to remember that there is no obligation to accept bitcoin or any other cryptoactive as a means of paying debts or other obligations. The future MiCA Regulation does not foresee that this will change.
Closely related to the foregoing is the extremely high volatility of these assets, which prevents the “adequate compliance and store of value” from being met, highlights the statement from the regulators.
-Problems derived from the cross-border nature: on many occasions, the different actors involved in the issuance, custody and commercialization of crypto assets are not located in Spain or, in some cases, it is even not possible to locate them, so the resolution of any dispute could be costly and fall outside the purview of the Spanish authorities.
-Theft, fraud or loss: the distributed ledger technology used for the issuance of . Their custody is not regulated or supervised. The loss or theft of private keys can mean the loss of cryptocurrencies, with no possibility of recovering them. This risk must be assessed before acquiring these assets, whether the wallet is managed personally, or its custody is left in the hands of third parties.
They cannot be a means of payment
For bitcoin, for example, to be able to displace official money, it would have to be accepted as a means of payment or measurement of value by economic agents for their exchanges. In addition, it should fulfill the function of being a unit of account and a store of value. Official money is today in developed countries a unit of account, which allows the prices of goods and services to be set, something that bitcoin is not.
It is also undoubtedly a means of payment, since it is accepted by all people to pay for the purchase and sale of goods and services. And finally, it is a store of value, which means that it retains its value over time, since it has the ability to buy goods and services in the future. Cryptocurrencies, if they intend to fill this gap at some point, still have a long way to go.
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