In November 2024, the value of certain cryptoassets has significantly and suddenly increased, hitting new records. This reflects an intensifying interest in relation to cryptoassets and confirms their highly volatile nature.
The European Securities and Markets Authority (ESMA) is cautioning investors against being caught up in this hype. They should reflect carefully before making any financial decision and consider their financial needs and objectives.
These events occur just a few weeks before the application of the Markets in Crypto-Assets Regulation (MiCA) to firms providing cryptoasset services. MiCA will start a new era of supervision for cryptoassets and related services as markets in cryptoassets are not yet regulated at European Union (EU) level. MiCA will enhance protections for holders of crypto-assets and clients of crypto-asset service providers as well as integrity of these markets.
Howeveer, the new MiCA regulation does not eliminate all risks.
ESMA reminds investors that, despite these new protections, the inherent risks of investing in cryptoassets remain. Many cryptoassets are highly speculative and volatile, with prices subject to sudden and extreme fluctuations, also overnight. The recent surge in the price of certain crypto-assets might therefore be yet another short-lived spike. In addition, cryptoassets are prone to novel risks due to the underlying technology.
MiCA’s safeguards are less extensive than those for traditional investment products. While MiCA aims to strengthen investor protection, it does not provide the same level of protection as those available for traditional investment products. For example:
- cryptoassets will not be covered by an investor compensation scheme. The rules covering traditional investment services (MiFID II), require investment firms to participate in investor compensation schemes. Such schemes compensate investors, for instance, if an investment firm goes bankrupt and is unable to return financial instruments (e.g. shares) belonging to an investor. In contrast, MiCA does not provide for similar investor compensation scheme protections for clients of cryptoasset service providers. Therefore, if your cryptoasset service provider is unable to return your cryptoassets, there is no ”safety net”;
- in contrast to the rules covering traditional investment services, MiCA does not require all providers of cryptoasset services to collect clients’ information to assess their ability to understand the cryptoassets products they wish to trade;
- cryptoasset service providers have no obligation to report to clients, on a periodical basis, the cryptoassets they hold on clients’ behalf and their updated or current value.
Clients may also not benefit from all protections immediately after MiCA enters into application. Most member states opted to allow existing national cryptoasset service providers to operate without a MiCA license during a transitional period of up to 18 months after MiCA becomes applicable.
As a result, clients may not fully benefit from the MiCA safeguards until as late as 1 July 2026, while national authorities will have limited supervisory powers until the cryptoasset service provider becomes authorized. Until that point in time, the national supervisory powers may be restricted only to the enforcement of anti-money laundering rules.
Clients should be very cautious when engaging with non-EU firms
Cryptoasset investments or related services offered by non-EU firms entail even lower safeguards, heightened risks of fraud and scams, and limited recourse (if any) in the event of disputes or claims against the provider.
Additionally, ESMA emphasizes that investors are not protected by MiCA when cryptoasset services are provided by firms not authorized in the EU.
Known risks are:
- you may lose all the money you invest;
- prices can fall and rise quickly over short periods;
- you may fall victim of scams, fraud, operational errors or cyber attacks; and
- you are unlikely to have any last resort right to protection or compensation if things go wrong.
If you are thinking about buying cryptoassets or related products and services, you should check that:
- you can afford to lose all the money you invest;
- you are ready to take on high risks;
- you understand the features of the cryptoassets and related products and services you are seeking or you have been offered;
- you are able to protect effectively the devices you use for buying, storing or transferring cryptoassets, including your private keys;
- the issuers of the crypto-assets you want to invest in have the right to offer such cryptoassets in the EU;
- the service providers you are dealing with are duly authorized to provide cryptoasset services in the EU.