The Cyprus Securities and Exchange Commission (CySEC) disseminated this week an announcement from the European Securities and Markets Authority (ESMA), emphasising the ongoing risks associated with crypto-assets despite a surge in their value in November 2024.

The statement coincides with the impending application of the Markets in Crypto-Assets Regulation (MiCA), set to provide a unified framework for crypto-asset services across the European Union.

“Certain crypto-assets have significantly and suddenly increased in value, hitting new records,” ESMA noted, reflecting the growing interest in the sector.

However, the regulator warned against the speculative nature of these assets.

“Investors should reflect carefully before making any financial decision and consider their financial needs and objectives,” the announcement said.

MiCA, which becomes applicable in the coming weeks, is expected to herald a new era of supervision, enhancing protections for crypto-asset holders and clients of related service providers.

“MiCA will enhance protections for holders of crypto-assets and clients of crypto-asset service providers, as well as the integrity of these markets,” ESMA stated.

However, the regulator cautioned that the new rules do not eliminate the inherent risks associated with these investments.

“Despite these new protections, the inherent risks of investing in crypto-assets remain,” the statement said.

ESMA highlighted the speculative and volatile nature of crypto-assets, adding that prices can experience “sudden and extreme fluctuations, also overnight.”

The authority also pointed to the unique risks posed by the underlying technology, which can expose investors to fraud, cyber-attacks, and operational errors.

ESMA underscored that the safeguards under MiCA are less extensive than those for traditional investment products.

“For example, crypto-assets will not be covered by an investor compensation scheme,” the regulator explained.

Unlike traditional investment services under MiFID II, crypto service providers are not required to participate in schemes that compensate investors in case of bankruptcy or lost assets.

Another critical difference is the lack of mandatory client assessments for understanding crypto-asset products.

“MiCA does not require all providers of crypto-asset services to collect clients’ information to assess their ability to understand the products they wish to trade,” ESMA pointed out.

The transitional period of up to 18 months for existing service providers to comply with MiCA poses additional challenges.

“Clients may not fully benefit from MiCA safeguards until as late as July 1, 2026,” the regulator noted, adding that during this period, supervisory powers of national authorities may be limited to enforcing anti-money laundering rules.

ESMA issued a stark warning to investors engaging with non-EU firms, emphasising heightened risks and limited recourse in case of disputes.

“Crypto-asset investments or related services offered by non-EU firms entail even lower safeguards, heightened risks of fraud and scams, and limited recourse,” the statement said.

The authority urged potential investors to exercise caution and thoroughly assess their readiness for high-risk investments.

“You should be aware of the specific risks of crypto-assets and related products and services and carefully weigh up whether the risks are acceptable, given your own objectives and financial situation,” ESMA advised.

Investors are reminded to consider critical risk factors, including the potential loss of all invested funds, extreme price volatility, exposure to scams, and limited rights to protection or compensation.

“If you are thinking about buying crypto-assets, ensure you can afford to lose all the money you invest and are ready to take on high risks,” ESMA stressed.

Additionally, investors are advised to verify that crypto-asset issuers and service providers are authorised to operate within the EU.

“You should check that the service providers you are dealing with are duly authorised to provide crypto-asset services in the EU,” the regulator recommended.

As the sector continues to evolve, ESMA remains steadfast in its commitment to safeguarding investors while clarifying the regulatory framework.

“MiCA aims to strengthen investor protection but does not provide the same level of safeguards as traditional investment products,” the statement concluded, urging investors to remain vigilant.