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Regulators in Europe and the US are asking investors to exercise caution when considering adding crypto assets to their portfolios.
The European Supervisory Authorities (ESA) have issued a warning to consumers who may invest in cryptocurrencies without doing due diligence on this riskier asset. The statement notes that many of these investments are highly speculative, volatile, prone to fraud and often include misleading information that promises quick or high returns. The ESA said in its statement that digital assets such as cryptocurrencies or NFTs “are not suitable for most retail consumers as an investment or as a means of payment or exchange”.
Days before the ESA announcement, the United States Department of Labor (DoL) issued a similar warning to consumers whose retirement plans included any crypto-asset investments. While the ESA focuses on consumer due diligence, the DoL focuses on fiduciaries’ responsibilities when investing on behalf of their clients’ pension portfolios.
The DoL explains its concerns by stating that “at this early stage in the history of cryptocurrencies, the Department has serious concerns about the prudence of a fiduciary’s decision to expose 401(k) plan participants to direct investments in cryptocurrencies or other products whose value is tied to cryptocurrencies.” Due to fiduciary obligations to offer their clients only carefully selected investments, offering cryptoassets may give investors an inaccurate impression of risk.
Despite both editions focusing on different groups and different investment typologies, both identify similarities in cryptoasset risk exposure. At a high level, these include extreme price volatility, exposure to fraud or hacking, lack of consumer rights, and a highly speculative pricing model. In the case of the DoL, fiduciaries must bear responsibility for adequately vetting the retirement investment plans for their clients. For the ESA, individuals are responsible for their investments and must be armed with adequate information to make sound decisions.
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Risk characteristic of crypto investments |
What does the DoL say? |
What does ESA say? |
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Extreme price volatility |
“Cryptocurrencies have been subject to extreme price volatility, which may be due to the many uncertainties associated with the valuation of these assets, speculative behavior, the amount of fictitious trading reported, widely publicized incidents of theft and fraud, and other factors. Extreme volatility can have a devastating impact on participants, especially those nearing retirement and those with significant cryptocurrency allocations.” |
“Many cryptoassets are subject to sudden and extreme price movements and are speculative because their price often relies solely on consumer demand (ie, there may be no hedges or other tangible assets) […]. Extreme price movements also mean that many cryptoassets are unsuitable as a store of value, as well as a medium of exchange or payment; |
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Insufficient recourse protection |
“Cryptocurrencies are not held as traditional plan assets in trust or custodial accounts, are easily valued and are available to pay plan fees and expenses […]. With some cryptocurrencies, simply losing or forgetting your password can result in your funds being lost forever. Other methods of holding cryptocurrencies may be vulnerable to hacking and theft.” |
“Most crypto-assets and the sale of crypto-asset-related products or services are not regulated in the EU. In these cases, you will not benefit from the rights and protections available to consumers for regulated financial services, such as complaints or recourse mechanisms; |
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Concerns about cost and valuation |
“Experts fundamentally disagree on important aspects of the cryptocurrency market, noting that none of the proposed cryptocurrency valuation models are as sound or academically defensible as traditional discounted cash flow analysis for stocks or interest and credit models for debt.” |
“How cryptoassets are priced and transactions are executed on exchanges is often not transparent. Holdings of certain crypto assets are also highly concentrated, which can affect prices or liquidity.” |
The warnings from both the DoL and the ESA touch on the very real consumer and investor protection risks currently pervading the cryptoasset market. Although both agencies are working to strengthen these protections, in the meantime, educating consumers about the risks and recommending increased caution when investing are two of the most important tools available to regulators.
India imposes a 30% tax on cryptocurrencies.
Next month, the government of India will start taxing crypto assets under the Goods and Services Tax (GST) at a rate of 30%. This is almost double their previous tax mark as a financial services product, which included taxes at a rate of 0-15% depending on the product and the length of the asset. Under their new GST label, cryptoassets will be considered akin to profits from gambling instruments such as casino or lottery.
Somewhat controversially, the government of India has also decided to include an additional tax of 1% deducted at source (TDS) on crypto-assets in the new mandate. TDS aims to curb tax evasion by taking a certain percentage – in this case 1% – directly from an individual’s source of income. This is charged regardless of whether there is a gain or loss.
These steep tax hikes are a tool for the Indian government to collect more tax revenue while discouraging things like speculative trading. The introduction of these new tax policies is largely unpopular and is likely to cause a lull in trading volumes for some of India’s 100 million crypto-asset users. Stakeholders warn that these burdensome tax regimes could stifle industry growth and drive innovation to countries with more favorable policies.
SEC delays two spot ETF offerings
On March 18, the Securities and Exchange Commission (SEC) issued notices that a decision on WisdomTree Investments and One River Asset Management’s proposed Bitcoin spot ETFs would be delayed. These decisions were postponed to May 15 and April 3, respectively.
The SEC released a statement explaining this delay. It said: “The Commission believes it is appropriate to set a longer period in which to issue an order approving or denying the proposed rule change in order to have sufficient time to consider the proposed rule change and the issues raised in the comments submitted in connection with it.”
So far, the SEC has either rejected or delayed all proposed Bitcoin spot ETFs submitted to their agency. Bitcoin spot ETFs are very attractive for investors, because they allow them to buy into a fund in which the value is tied to the real market price of this asset. This gives them the advantage of exposure to cryptoassets without independently selecting individual assets to invest in.
Several bitcoin futures ETFs are already listed on US exchanges. Unlike a Bitcoin spot ETF, a futures ETF allows consumers to invest in futures contracts – or contracts used to buy assets at predetermined prices at the end of the month. These ETFs provide access to assets without actually trading BTC, but can present some challenges for long-term investing.
Powell takes aim at crypto during BIS panel
While speaking on a panel at the Bank for International Settlements, Federal Reserve Chairman Jerome Powell told attendees that the “same activity, same regulation” rule applies to cryptocurrencies. Essentially, this regulatory principle means that if two things perform the same task, they will be regulated in the same way. This means that new technologies like NFTs or digital assets will be regulated as the existing financial instrument they most closely resemble.
Although such procedures are often intended to achieve fairness, they become more difficult to apply when technologies evolve much faster than regulators can keep up with. Tying technologies to legacy product boundaries and rules creates an unnecessary burden on market innovation. Consumer and market protection policies need not be mutually exclusive with forward-looking rules.
Abu Dhabi issues proposals for NFTs and virtual assets
On March 21, the Abu Dhabi Global Market (ADGM) announced its proposals for improving capital markets and virtual assets at ADGM. The Financial Services Regulatory Authority (FSRA) reminds readers that all regulated entities – including those engaged in fiat or crypto businesses – are required to comply with the same strict requirements for anti-money laundering compliance and sanctions regimes.
Notably, the ADGM classifies NFTs as a type of intellectual property rather than an investment contract. Foreign regulators – including those in the US – often consider NFTs to be investment contracts first, with intellectual property becoming more of a secondary feature for NFTs.
The paper states: “NFTs, being akin to intellectual property rights over unique creations, cannot by themselves represent specific investments or financial instruments.” Although the FSRA does not currently propose to establish a formal regulatory framework for NFTs, the FSRA is open to NFT activities (where such NFTs do not relate to specific investments and would otherwise be caught by the FSRA’s existing regulatory framework) undertaken within the ADGM- and in certain circumstances.”
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Regulation for the implementation of the NFT law
