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Cryptocurrencies are digital money created by a programming code. A cryptocurrency is not issued by a bank or central authority and it is therefore virtually immune to any governmental manipulation or any interference by any state authority. This time however, the lack of regulation does not offer absolute freedoms to the investors, yet it brings about especially significant risks.

The technology on which the cryptocurrency is based has some essential features. First of all, it is irreversible: once completed, no transaction can be reversed, there is no safety net. Then, neither transactions nor accounts are connected to real-world identities, everything is digitized, with exclusive access via the Internet, thus conferring a higher degree of anonymity. The transactions have a “global speed”, they are almost instantaneous and confirmed throughout the network in just a few minutes. There are no third parties involved in verification or validation. Transaction security is given by a cryptography based on very large numbers, making it impossible to break the scheme. The software is free and accessible to anyone.

But all these features come along with risks and vulnerabilities for cryptocurrency investors. Easy and unlimited access to platforms encourages speculators who have generated a feverish trading activity trying to take short-run advantage from the possession of digital currency. Risks of cryptocurrency trading are mainly related to their volatility: unexpected changes in the market sentiment may lead to sudden and brutal price movements, with thousands of dollars possibly falling from one moment to the next, as it has been recently noticed. As pointed above, the cryptocurrencies are not backed by any central bank, national or international organization, or assets or other loans, and their value is strictly determined by the value that the market players set through their transactions, which means a loss of confidence may lead to the collapse of transactions and to a sudden and considerable decrease in value. Then there is the risk of cyber fraud: cyber-criminals can access cryptographic exchanges, plunder cryptographic wallets, and infect individual computers to steal cryptocurrencies. Hackers also take advantage of the fact that the cryptocurrencies depend to a large extent on unregulated companies, which are not subject to any

adequate internal control, and which are much more susceptible to fraud and theft than the regulated financial institutions.

Some countries may prevent the use of the currency or may declare that the transactions violate anti-money laundering regulations, regardless of the global implications. Given the complexity and decentralized nature of the cryptocurrencies (over 1,000 created since the birth of Bitcoin, from 2009 until today) and the significant number of participants – senders, recipients (possibly money launderers), operating and trading platforms, foreign exchanges – there is not a unique approach in this respect.

On the other hand, among those who want “strong financial sensations”, namely among those who take high levels of risk and enjoy – or, as the case may be, complain – following the spectacular developments in the quotation of cryptocurrencies, there is a fear that increased regulation would affect trading volumes and prices, stifle innovation in cryptocurrency creation, and make participants flee to less restrictive jurisdictions. But researchers say that’s not quite like that.

Here are some remarks made by Brian Feinstein and Kevin Werbach, professors at Wharton College of Law and Business Ethics at the University of Pennsylvania, who argue that stricter regulation could actually clean up the industry of bad-faith players and

generate more confidence in the market, which would be a significant growth factor for the sector. Despite concerns that strong regulations would dampen the crypto-enthusiasm or push trading to more laissez-faire countries, there is little evidence of falling prices due to regulatory initiatives, and there is “no evidence of capital flight”, Feinstein and Werbach argue. The two looked at several markets around the world to see if regulating cryptocurrencies would lower their price, and their conclusion is “almost always not.”

It is true that there are falling prices when countries take measures to combat money laundering and this is evident insofar people who use cryptocurrencies trade for illicit reasons. But other categories of regulations – tax regime, securities law, cyber-security and anti-fraud measures – do not affect volume or trading, and the crypto traders do not evade that jurisdiction for more permissive countries. Regulators help curb cryptocurrency prices when clearing the market of illegal activities and thus provide a safer environment for genuine investors.

The western countries are moving towards traditional securities regulation, while authoritarian countries (see China, Turkey) ban private cryptocurrencies, which are seen as a strategic threat. For its part, the European Commission intends to support the competitive development of the EU financial sector and provide consumers with access to innovative financial products, while ensuring consumer protection and market stability. In September 2020, the European Commission introduced its digital finance strategy and legislative proposals on cryptocurrencies and digital resilience. But the proposal is still under discussion, being subject to the co-legislative process and therefore the consumers do not currently enjoy any of the guarantees provided for in that proposal, as it is not yet adopted as EU legislation.

In this context, the Financial Supervisory Authority reminds the Romanian investors of the high level of risk and of the speculative nature of the cryptocurrencies. These are not yet regulated, as they are not regarded as financial instruments according to Law 126/2018 on financial instrument markets. In this context, the FSA warns the Romanian consumers that in cryptocurrency transactions they do not benefit from the protection and guarantees related to the regulated financial services.

Daniel Apostol

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