Caveat Emptor! CySec Points Out Dangers Of Bitcoin Trading

Whilst virtual currencies have polarized the opinions of governments worldwide, CySec takes a conservative view, today issuing a warning to potential bitcoin traders

Less than one day subsequent to the Singaporean financial markets regulatory authority having made its intention to regulate virtual currency intermediaries public, the ubiquitous Cypriot regulator, which operates in an island with a vast number of retail FX firms under its auspices, has this evening released a warning to potential investors on what it views as the dangers of buying , holding or trading of virtual currencies which are not conventional money or financial instrument.

Although the warning expresses the regulator’s concern over the potential pitfalls of trading virtual currencies in general, it does specifically single out Bitcoin as a specific example.

The virtual currency is one type of non -adjustable digital product , which is not issued by Central Bank nor is under warranty or under the supervision other competent authority. It has been observed that the virtual currency used as a means Payment for the purchase of products or services , or as a means of investment.
Using bitcoin as an example , the virtual currencies may be purchased platforms using conventional currency exchange . These platforms is not supervised . Once purchased , virtual currencies are transferred to a personalized account known as ‘ digital wallet ‘.

Using this wallet , consumers can send bitcoins electronically directly to anyone who is willing to accept them , or turn them into conventional currency.
Within CySec’s warning, the regulator explains the method of production which Bitcoins undergo via a peer-to-peer virtual creation system which limits the number of artificial coins in circulation, detailing that new bitcoins are created electronically (online) using advanced software systems , known as bitcoin miners. Investors are alerted that such systems allow their users to anonymously ‘extract’ small amounts of virtual currency through solving deliberately complex algorithms. However, the increase in the supply of coin is fixed and thus only small amounts are released over time .
Whilst this procedure has proven highly profitable for certain traders and the demand for virtual currencies spiraled during the course of last year, CySec is concerned that the value of virtual currency exchange fixed platforms where supply and demand that exists solely via people who carry out transactions because of the above procedure, this issue can not be resolved by any authority, rendering a cause for much debate over the feasibility of the Monetary Authority of Singapore’s proposals to regulate certain aspects of the Bitcoin business on its territory.

As an appendage to its warning, CySec candidly detailed a series of potential risks to investors associated with the buying, trading and exchanging of Bitcoin along with other virtual currency, highlighting that there is a risk that investors may lose their money in the platform of a virtual currency exchange. Virtual coins can be purchased directly from someone who owns a supply, or through an exchange platform . CySec points out that there have been instances of some exchange platforms having closed or collapsed resulting in a number of consumers permanently losing significant amounts of money with no recourse. 
It is important to note that the exchange platforms are not banks, which keep the virtual currency in the form of deposits. If an exchange platform lose money or break down, there is no specific legal or other protection, a matter which CySec expresses concern over.
The money can be stolen from an investor’s digital wallet when purchasing virtual currency , and then stored in a ‘digital wallet ‘ in a computer or smartphone. Access to digital wallets is usually via codes . However , digital wallets are not secure from violation by hackers or from theft or loss, or the destruction of the storage device holding the virtual currency.

CySec also demonstrates concern that the value of virtual currency can change rapidly and as a result of this, the value of virtual currencies have significant and abrupt fluctuations. Therefore, the value can be made ​​fast rise or fall but may even deplete to zero.
The trade in virtual currency can be abused for criminal activities, including money laundering crimes, which CySec considers a reason to exercise extreme caution as there is no jurisdiction over such potential criminal activity. Similarly, CySec asserts that trading in virtual currencies is public , but information relating to holders of currencies and beneficiaries of transactions is not. These transactions are largely non-detectable and provide consumers with virtual currencies a high level of anonymity . Therefore, according to CySec, the network of virtual currency is likely to be used to carry out transactions linked to criminal activities, including money laundering .
The notice from the Cypriot regulator concludes by emphasizing the need for caution, with investors being encouraged to examine all aspects of the purchasing, holding or trading of virtual currencies and know and understand their associated risks.

An interesting move, especially considering that a large proportion of Cyprus’ financial services sector is made up of FX and binary options companies, very few of which offer Bitcoin trading.

It certainly appears that CySec views the prospect of a cashless society through a similarly dystopian lens as that held by George Orwell.

For more on the global Forex industry see the LeapRate-Dow Jones Forex Industry Report.

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