Cryptoassets are dangerously unregulated and may give rise to criminal activities, according to two recent assessments published by the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA).
Consumers could be put at risk due to the fact that the patchwork nature of rules across member states allows for loopholes to be exploited, with ESMA highlighting the “most significant risks as fraud, cyberattacks, money laundering, and market manipulation.”
“A number of cryptoassets fall outside the current financial regulatory framework,” Steven Maijoor, Chair of ESMA said on Wednesday (9 January). “This poses substantial risks to investors who have limited or no protection when investing in those cryptoassets.”
“In order to have a level playing field and to ensure adequate investor protection across the EU, we consider that the gaps and issues identified would best be addressed at the European level.”
Cryptoassets include cryptocurrencies, such as Bitcoin, as well as Initial Coin Offerings (ICOs), a funding mechanism in which new ventures sell their assets for cryptocurrency.
Furthermore, ESMA advocated for EU Anti Money Laundering Requirements to be applied to cryptoassets and for appropriate risk disclosure measures to be made mandatory, “so that consumers can be made aware of the potential risks prior to committing funds to cryptoassets.”
Meanwhile, the EBA also published their own report on Wednesday noting that “typically activities involving cryptoassets fall outside the scope of EU banking, payments and electronic money regulation and risks exist for consumers that are not addressed at the EU level.”
The EBA’s report concludes that they would like to see the European Commission consider regulation in the field of cryptoassets in order to deal with the concerns surrounding the patchwork nature of regulation across the union.
The EBA’s Executive Director, Adam Farkas, said: “The EBA’s warnings to consumers and institutions on virtual currencies remain valid. The EBA calls on the European Commission to assess whether regulatory action is needed to achieve a common EU approach to cryptoassets.”
In October, the Financial Action Taskforce recommended that criminal activities in cryptoassets, such as money laundering, should be stamped out. The EBA further emphasised that such recommendations should be taken account of.
This week’s reports come after significant fluctuations in the valuation of cryptoassets in 2018, falling from $800 billion at the start of 2018, to around $200 billion later in the year, prompting ESMA and EBA to issue warnings to consumers that they should avoid investing in cryptoassets.