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Crypto investments pose ‘significant’ risks to investors, warns Central Bank of Sri Lanka

Sri Lanka's central bank warned the public of 'significant financial, operational, legal, customer protection and security-related risks posed by investments in VCs.'

Central Bank of Sri Lanka Building / Image by: Wikimedia Commons

Tue, 13 Apr 2021, 03:37 am UTC

The Central Bank of Sri Lanka (CBSL) has issued a warning to the public on the risks associated with investing in cryptos such as Bitcoin (BTC) and Ether (ETH). The notice came as trading volumes and interest in digital currencies continue to surge amidst the market rally.

The CBSL issued the notice warning after receiving queries on cryptocurrency. “Considering the recent inquiries on virtual currency usage in the international and domestic markets, the Central Bank of Sri Lanka (CBSL) wishes to inform the public of the risks associated with investing in virtual currencies,” the bank wrote on the notice, which was published on its site on April 9, 2021.

The country’s monetary authority explained that virtual currency (VC), which is also commonly known as cryptocurrency, can be obtained through participating in initial coin offerings (ICO), crypto mining, or cryptocurrency exchanges. The bank mentioned Bitcoin (BTC), Ethereum (ETH), and Litecoin (LTC) as some of the world’s most popular virtual currencies.

“However, it is important to note that VCs are not issued by Central Banks and are also not generally backed by underlying assets,” the CBSL warned. “Therefore, their values are determined by speculation of the public on VC Exchanges.”

The bank also pointed out the lack of a regulatory framework in the country that could protect crypto investors and users. “There are no regulatory safeguards relating to the usage, investment, or dealing in VCs in Sri Lanka,” the CBSL added. “Therefore, investing or using VCs in Sri Lanka poses significant risks.”

This means that should things go wrong, crypto investors would have no legal recourse. “Users/investors will have no regulatory or specific legal recourse in the event of any user or transaction-related issues or disputes,” the bank said.

The CBSL also highlighted the volatility of crypto prices “exposing the investment of VCs to a risk of making large losses.” The monetary authority also mentioned that there is a “high Likelihood of VCs being associated in financing terrorist” and other criminal activities.

The bank warned that crypto users and investors might be unknowingly violating Foreign Exchange Regulations. “As VCs are traded as assets in Exchanges, purchasing VCs from abroad would lead to a violation of Foreign Exchange Regulations, as VCs are not identified as a permitted investment category in terms of the Foreign Exchange Act No. 12 of 2017 (FEA).” The bank added that Electronic Fund Transfer Cards (EFTCs) such as debit cards and credit cards can’t also be used for “payments in foreign currency related to virtual currency transactions, in terms of the Foreign Exchange Regulations in Sri Lanka.”

“The public is therefore warned of the significant financial, operational, legal, customer protection and security-related risks posed by investments in VCs to the users as well as to the economy,” the monetary authority concluded. The CBSL also noted that it has not given out any license to any firm to operate crypto exchanges or launch ICOs in the country.

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