One of DNB’s core tasks is to ensure financial stability. Cryptos are a potential threat to this stability. Therefore, together with the AFM, DNB will increase the supervision of publishers and service providers in this market as soon as the new European rules come into force.
The future of cryptos is uncertain, but they will definitely stay, with all the associated risks. The crypto market is not a financial free state and regulations are in full swing.
What is crypto?
According to the European Commission, a crypto is “a digital representation of a value or right that can be traded through a distributed ledger (eg a blockchain) or similar technology’.
You can say that a crypto is an entry in a kind of digital ledger or register. It is not stored centrally, but spread over several computers. This is done through distributed ledger technology (DLT). There is no authority or company that controls this process.
Backup and unsupported cryptos
We distinguish between unsecured cryptos and secured cryptos. Non-backed cryptoassets are values or rights that exist only in DLT. They are nothing more than entries in a distributed ledger.
Backed crypto assets, on the other hand, represent underlying assets (values) that exist outside of DLT. They are issued and purchased by parties who undertake to buy and sell the underlying collateral assets in the traditional economic or financial system.
Cryptos are not suitable as money
DNB does not consider unsecured cryptos to be money. The price trend is too volatile for that. Money has the function of means of payment, store of value and unit of account. Cryptos cannot perform all these functions well.
Since there are no underlying assets and no monetary authority to stabilize the value, the value of cryptos is highly uncertain. Because there are so many cryptos that are not related to each other, they are also unsuitable as a unit of account. It would be very confusing to show prices in Bitcoin, Ether, Sol, Ada and XRP. The users of cryptoassets seem to be coming to the same conclusion. In 2022, only 3% of Dutch crypto owners will have bought anything with it.
Buy and sell cryptos
Unsecured cryptos are therefore unsuitable as means of payment, but they are attractive for gambling. Despite warnings and the real chance of losing money, cryptos are growing in popularity. By the summer of 2022, an estimated 14% of the Dutch population will have cryptos. As uncertain as it may be, many fear missing the crypto boat.
There are many types of cryptos in circulation and every day more disappear or are added. Well-known cryptos are Bitcoin, Ether and Etherium. There is no financial authority that regulates their value.
In addition to the crypto developers, there are also brokers, trading platforms and all kinds of service providers within this market. This entire infrastructure has been compared to an ecosystem. Due to its complexity, anonymity and unclear governance structures, this ecosystem appears to be more susceptible to market failure than traditional financial markets.
Anyone can develop cryptos and enter the crypto market with all the consequences that entails. Risks such as theft, loss due to fraud or insider trading are not uncommon. For consumers, it often looks more like the Wild West, with merchants acting as “crypto cowboys.”
Risks for consumers
We therefore do not see unsecured cryptos as a means of payment. Neither are securities, such as shares in a company, or bonds. People who buy uncovered cryptos are speculating on an increase in value. Because of the large fluctuations in value, that chance is present. But there are also big losses. Thus, trading unsecured cryptos is more like gambling and involves similar risks:
- unsupported cryptos have no fixed value
- cryptos are vulnerable to theft (hacking)
- the market is complicated
- if you lose a lot of money, there is no safety net, such as the deposit guarantee scheme on your savings account
- the supervision of the crypto market is currently not as well regulated as the supervision of other financial markets
Consumer protection and information
There is currently little legislation to protect consumers when buying crypto. New legislation is on the way. Until then, DNB and AFM can only warn about the risks. In the summer of 2022, the Ministry of Finance launched an information campaign about cryptos for young people: Slim in Crypto – SIC – Money Wise.
DNB and AFM (Financial Markets Agency) have different roles. DNB’s main task is to ensure the stability of our financial system. AFM immediately protects consumers against irresponsible risks. For cryptos, this protection is not yet sufficient in order. Additional rules have been made in a European context, but they have not yet entered into force.
Risks, rules and supervision
The availability and anonymity make cryptos very suitable for illegal use. There are major risks in the areas of money laundering, tax evasion, privacy and consumer protection.
DNB currently supervises only on the basis of the Act on the Prevention of Money Laundering and the Financing of Terrorism (Wwft) and the Sanctions Act (SW). This means that companies offering services for the exchange between virtual money (crypto) and regular money (trust money) and companies offering crypto depository wallets (wallets) must register with us. Consumer protection and financial stability rules also apply to insurance companies and banks, but there are no such rules yet for crypto service providers.
The future of cryptos is uncertain, but they are not going away. Crypto markets change and regulation follows these changes but always comes later. DNB investigates this and collaborates nationally and internationally on standards for this new market, so that it meets the same requirements as the traditional financial markets.
The rules for cryptos must provide a better response to the risks. The problems are international and must be solved internationally. Therefore, European legislation is on the way: Market in Crypto-Asset Regulation (MiCAR).
The main objectives of this new regulation are:
- provide legal certainty
- support and promote innovation
- protect consumers
- ensure financial stability
MiCAR is expected to enter into force in 2024. Read more about MiCAR here.