22.10.2022
The Chairman of the Cyprus Securities and Exchange Commission (CySEC), George Theohharides, released a formal letter this week to educate investors on the risks of investing in crypto assets in Cyprus.
Theohharides stated that investor interest in crypto-assets worldwide is growing and the inherent risks, along with lack of proper information and online hype, could lead to material losses for investors.
“Thus, it is critical that investors and the public at large are informed and aware of the risks associated with investing in crypto assets,” Theohharides said, noting that relevant educational messages about the risks and attributes of crypto assets should be effectively communicated to the public in the first place. turn to protect retail investors.
“The rapid growth of crypto asset markets and the ecosystems that support them creates new challenges and risks for all regulators around the world,” he added.
The CySEC chairman explained that while technological innovation offers many promising opportunities, including improved access to financial services, the immaturity of the ecosystem and the assets themselves “may hinder confidence-building in the sector.”
Theohharides also provided an overview of crypto assets for all those new to this particular area of investment. Cryptocurrency assets, he explained, are often sold or auctioned off in what is known as initial coin offerings (ICOs). Also, crypto assets in ICOs are called tokens, which is why ICOs are sometimes referred to as token generation events (TGEs).
“Similar to Initial Public Offerings (IPOs), the primary purpose of an ICO is to raise funds from third parties to fund an idea or business model, offering private investors the opportunity to invest in it,” Theocharides said.
“ICOs often contain a so-called “white paper”, which can be seen as a summary of the key features of a planned project, but they usually do not offer the same guidelines and details as are provided in regulated securities prospectuses, allowing much less transparency and possible confusion. the public regarding the risks associated with investments,” he added.
Theohharides also noted that investors should be aware that investing in crypto assets also comes with liquidity risks, volatility risks, cyber risks , the possibility of fraud, as well as other hazards. Liquidity risk refers to the limited ability to sell crypto-assets whenever one wants, exchanging them for money and not losing money in the process.
“Many crypto assets have no material value – unlike traditional securities such as stocks or bonds, as a result of which their value and price depend solely on supply and demand, which in most crypto assets can be highly speculative,” Theocharides said.
“This can lead to high price volatility and large losses for investors,” he added. In addition, the commission chairman warned that aggressive marketing campaigns through online media, social media channels and celebrity or influencer endorsements can often target less sophisticated and inexperienced low-risk retail investors.
He noted that it is not easy for the public to understand the various functions and characteristics of each crypto asset, especially due to insufficient or inaccurate information and risk disclosure, high-tech documentation language, and the promotion of increasingly complex products by crypto firms.
“It can be said that crypto assets are a truly global market with no national or jurisdictional boundaries, and since there is currently no comprehensive regulation of crypto assets at the national or international level, in many jurisdictions crypto assets are not governed by existing rules,” Theohharides stated.
“As a result, investors are not covered by conventional indemnity systems or deposit protection schemes in the event of financial insolvency of a custodial wallet provider,” he added, noting that bringing a successful claim against a crypto asset issuer, wallet provider, or intermediary can be difficult, “leaving crypto asset owners also exposed to counterparty risk.”
Subsequently, Theohharides emphasized the urgent need for pan-European regulation, adding that the proposed EU Crypto Asset Markets Regulation (MiCA) would establish regulatory requirements for the public offering and marketing of crypto assets and the provision of related services, as well as include provisions to prevent market abuse using crypto assets.
“MiCA aims to bring crypto assets, crypto asset issuers, and crypto asset service providers together under a common regulatory framework to protect investors and maintain financial stability, while enabling and encouraging innovation in the crypto asset sector,” he said.
Meanwhile, Marina Chernenko, managing director of UFG Capital, said that “the rapid growth of investor interest in crypto assets around the world, along with their inherent lack of proper information and online hype, could lead to material losses for investors.”
“Thus, we agree with George Theohharides, Chairman of the Cyprus Securities and Exchange Commission (CySEC), that investors should be aware of the risk associated with their investments,” she added. Moreover, Chernenko stated that the company fully supports CySEC’s steps to increase financial literacy among investors, especially in informing about the risks of investing in crypto assets.
In addition, the company said that the interaction of AIF managers with alternative investment funds (AIFs) specializing in crypto assets should become a concrete investment strategy.
“According to the guidelines for European Union (EU) institutions published by the European Securities and Markets Authority (ESMA), crypto assets qualify as financial instruments. As such, the Alternative Investment Fund Managers Directive (AIFMD) does not list eligible or ineligible assets (including cryptoassets), and AIFs can effectively invest in any traditional or alternative assets as long as the AIFM can enforce the AIFMD,” she explained.
“In our opinion, the management of AIFM crypto investment funds will require a license renewal. We look forward to the further creation of a regulatory framework for existing participants in the stock industry and new ones coming to Cyprus,” Chernenko concluded.
