Central Bank warns on cryptoassets

Brendan Burgess

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Central Bank warning on investing in crypto-assets

· Europe-wide warning highlights risky and speculative nature of crypto-assets.

· People should be alert to misleading ads, especially on social media.

· Central Bank of Ireland explainer and warning for consumers on virtual currencies.



The Central Bank has today (22 March 2022) issued a fresh warning on the risks of investing in crypto assets, as part of a European-wide campaign by the European Supervisory Authorities.



The Central Bank again emphasised that crypto assets are highly risky and speculative, and may not be suitable for retail customers. In particular people need to be alert to the risks of misleading advertisements, particularly on social media, where influencers are being paid to advertise crypto assets.



Derville Rowland, Director General Financial Conduct said: “In Ireland and across the EU we are seeing increasing levels of advertising and aggressive promotion of crypto asset investments.



“While people may be attracted to these investments by the high returns advertised, the reality is that they carry significant risk.



“Before you buy crypto assets, you need to think about whether you can afford to lose all the money you invest. Do the promised fast or high returns seem too good to be true?



“People should also be aware that if things go wrong, you do not have the protections you would have if you invested in a regulated product.”



The Central Bank has published a plain English explainer for consumers on cryptocurrencies.



ENDS



Notes to Editor

The European Securities and Markets Authority (ESMA) is an independent EU Authority that contributes to safeguarding the stability of the EU's financial system by enhancing the protection of investors and promoting stable and orderly financial markets.



Derville Rowland has served as Chair of ESMA’s Investment Management Standing Committee since 1 July 2021. Standing committees are expert groups drawn from ESMA staff and Member States’ National Competent Authorities. The Investment Management Standing Committee works on issues relating to the investment funds sector and is responsible for the development of policy and supervisory convergence activities.



ESMA Statement on Investment Recommendations on Social Media (October 2021)
 
Can't complain about the damning comments on bitcoin but maybe @tecate would have something to say about this
Central Bank of Ireland said:
Official currencies are centralised and guaranteed by a central bank that controls their supply. So for example, the European Central Bank guarantees the euro and controls its supply in the euro area.
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The ECB guarantees that the euro will be a euro but then we can also be guaranteed that a bitcoin will be a bitcoin. Neither can guarantee me what a pint of Guinness will cost me next week.
 
This should be become a pinned / locked topic to avoid it going off topic.

I think that is a good bipartisan statement that sticks to facts of the risks associated for retail investors. This is a consumer protection forum first and foremost.
 
Brendan Burgess said:
But that is the problem. They have lost control of the supply.

Brendan
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It is more a case of that they have lost self control. Like a driver of a car. She remains in control but she sees the only way out of some danger is to slam the foot down on the accelerator.
The Central Bank are taking these cryptos for what they are in practice - a highly speculative asset - they use the word "asset". They point out that it fails the 3 main tests of a currency, Store of Value, Unit of Account and Medium of Exchange.
But as a speculative asset it still leaves it as a potentially viable part of a portfolio especially in these very uncertain times. I prefer the BOHA argument of the Nobels and Roubini.
 
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I wasn't going to bother posting on this thread at all - as I thought Brendan's initial post was a very reasonable point to put across - with no further commentary necessary. There are a whole host of wayward projects and out and out scams in the crypto space. I don't want to see bad actors in the space so I welcome the suggestion of a need for an abundance of caution.

If we're talking about 'crypto' rather than 'bitcoin', then there are all manner of risks (inclusive of rug pulls and out and out scams that capitalise on latent greed and ignorance). I'm not sure what you found 'damning' in its commentary relative to bitcoin though, Duke.

What Milton Friedman can instruct you re. the price of yer pint is that inflation has a significant part to play and inflation is 'always and everywhere a monetary phenomenon'. By implication, expand the € supply and your pint will be costing you more. You brought that up so I'm addressing it - but I guess we can stick to the subject of risk relative to crypto.
 
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The Governor was asked about this just now at the Oireachtas Finance Committee

Jim O’Callaghan :Should crypto currency be banned?

Governor : I don’t add the word currency to crypto

Some crypto is a gamble – like playing a fruit machine

There is no need to ban it.

Jim O’Callaghan: Should it be regulated

There may be a case. The most important thing is to make sure that people understand it.

There are other cryptos which are backed, or alleged to be backed, by currency.

Europe is introducing a new regulatory system.

There are no financial stability risks now, but there could be

Pearse Doherty : Is it your view that Crypto is being used here to avoid sanctions?

Governor: We have seen no evidence of it . But there are things happening which are not obvious to us using technology.

Deputy Governor: They might be moving Roubles into crypto
 
Brendan Burgess said:
The most important thing is to make sure that people understand it.
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How can anyone truly understand bitcoin when we don't even know who invented it, or what the true motivations for its invention might really be. Lots of people are putting a hell of a lot of faith in incredibly complex code and encryption keys that they can't possibly ever hope to understand fully. How can you even begin to understand the technology behind bitcoin and what would happen if the technology was compromised, attacked or suddenly crashed ?

I think people are fooling themselves if they believe they understand enough about bitcoin to invest in it without having serious concerns.
 
The code is open-source. You can examine it, interrogate it, etc. The bitcoin network has been subject to various types of attack repeatedly over the course of more than a decade and has never been hacked. There's a multi billion dollar honeypot (and what was a trillion dollar honeypot on occasion last year) there to incentivize such attacks since many years already.

Otherwise it's a decentralized network and whilst I'd be open to it's creator(s) having a different motivation to the one presented, nobody can assume full control over the network itself.
 
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One of the issues is that crypto is tradable 24-7, that means market volatility impacts may not be manageable.
 
Nordkapp said:
One of the issues is that crypto is tradable 24-7, that means market volatility impacts may not be manageable.
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In the same way as the London Metal Exchange's nickel market was managed recently in it being shut down to save Asian based entities?

There's plenty of volatility in bitcoin but it's a real market in that respect. Nobody has the power to manipulate it by pausing trading. If it's flushed out to the up or downside, that's quite the movement but it's real and unadulterated.
 
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I'm not sure about you, but I know that my examination or interrogation of an open-source network would be about as futile as me trying to solve the jack the ripper murders. I would have thought that would also be the case for the lay person, so I would say most people investing in it do not really understand it in any shape or form.
 
We're talking about the brightest of minds on a global basis attacking a trillion dollar honeypot over 12 years. You can be certain that throngs of them have already tried, and it's for this reason that the bitcoin codebase is deliberately limited and conservative - unlike other blockchains.

As regards ordinary people not understanding it, ordinary people don't understand technology that underlies other financial systems and still use them.
 
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tecate said:
As regards ordinary people not understanding it, ordinary people don't understand technology that underlies other financial systems and still use them.
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Most people don't know how their phones /cars/fridge/mortgages actually work, doesn't stop them using them.
And for that matter very few have asked the question what the euro in their pocket actually is.

The more I've investigated bitcoin the more it has shown me the gapping holes in our current monetary system. 99% of people spend their life chasing the € and never actually ask what it is and why it has value.
 
tecate said:
I wouldn't be taking my cues from a central bank on crypto but notwithstanding that, I don't think there's anything unreasonable about that exchange. At a minimum, we can all agree on this ->
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Yep, it's hardly in their centralised interest to advocate for a decentralised swathe of potential competitors.
 
Horatio said:
Yep, it's hardly in their centralised interest to advocate for a decentralised swathe of potential competitors.
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For sure albeit in the case of bitcoin, whilst they don't like it, it seems they're prepared to put up with it for the most part. They tolerated gold so btc isn't too much different. There are still battles ongoing to try and control it rather than ban it.
It doesn't have to compete with fiat per se, unless fiat currency is mismanaged - and that's within the control of whomever runs a centralized fiat currency.
Fiat = current a/c
BTC = savings (and no, I'm not in any way saying that anyone puts all savings or anything more than a couple of % in btc right now... not for some time until it settles and matures into that role).
 
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I really don't know where to start with this - I forgot rule number one - never get into an argument about Bitcoin with someone who has money invested in Bitcoin. I'm confident that I do actually know how our current monetary system works, and why, and while its not perfect, I'm happy to stick with it for the time being.

You're right, most people don't take the time to investigate how their fridge works, but it actually provides them real utility and won't swallow all their wealth
 
I don't hold Bitcoin, but my training and profession means I do understand a lot of the implementation details (Merkel trees, one-way functions, hash puzzles, Nakamoto consensus/proof of work, etc.).

I'm sceptical about industry adoption of 'crypto', even in the fintech domain - apart from pure crypto plays, most seem to involve centralized gatekeepers stamping out blocks or tokenizing assets. If you trust those centralized players, why do you need blockchain? And if you don't trust anyone, bootstrapping real trust is hard; there have been a lot of initial coin offerings where the founders vanished with the loot.
 
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