EU regulator warns investors on non-regulated digital currency risks

The securities regulator of the European Union has issued a warning to investors about the risks of investing in “non-regulated” cryptocurrencies, in their latest alert about digital currency speculation to be published by a leading global regulatory body.

The European Securities and Markets Authority (ESMA) published the warning as part of its “Trends, Risks and Vulnerabilities” report, which analyzed the implications of the COVID-19 crisis on financial markets and investors.

The report said digital currencies enjoyed a surge in volumes and value over the second half of 2020, pushing some digital currencies up to all-time highs. In part, this was attributed to “positive newsflows in the crypto sector,” including news that payment giant PayPal was preparing to launch digital currency functionality on its platform.

The report also said strong demand in light of the uncertain global economic picture had driven investors to alternative investments and speculation in digital currencies, fueled by the global response to the pandemic.

“It is also fuelled by strong investor demand and search for yield amid unprecedented global fiscal and monetary stimulus.”

In comments aimed directly at investors, the European regulator described digital currencies as “highly volatile and bear[ing] high risks for investors.”

The report also highlighted the growing interest in DeFi, or decentralized finance, which it said would continue to pose challenges around regulation and supervision for regulators across the bloc.

In particular, the report highlighted the benefits and risks of decentralized finance, including disintermediation and 24/7 availability on the plus side, as well as operational resilience, scalability and governance on the risk side.

The report from the regulator may be made more significant if it becomes the chief authority in the European Union for digital currency regulation, as proposed by the chairman of the French securities regulator, the Autorite des Marches Financiers.

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