New Zealand Financial Regulator Warns About Risks of Investing in Bitcoin

News, Opinion, Regulation | February 18, 2021 By:

New Zealand is among those countries which are constantly printed on progress and innovations. The country has a very open approach towards many industries. The progress and the tolerance in many fields have been very vibrant during the pandemic period and the way the country dealt with the severe economic and social crisis as well. 

Despite the liberal attitude, the Financial Markets Authority of New Zealand, also known as FMA, has recently spoken about the possible risks in the financial markets, especially about the risks in the crypto industry. The country warns the crypto users about the potential negative outcome of investing in the crypto-assets and mainly Bitcoin. The recent news reported by the country’s financial watchdog, crypto traders may lose their money if they continue investing in digital assets. 

Existing concerns have raised especially since the recent sudden movement of the Bitcoin prices, which was very unexpected for everyone. Any user who knows the nature of Bitcoin already has figured out the risks of the crypto trading consent. Moreover, the competition in the crypto market is increasing daily and there is a huge number of competitors. Despite the huge advantage of Bitcoin and the great awareness of the brand identity, there always is the real technological risk to other cryptocurrencies in the form of the potential appearance of more advanced cryptocurrencies. One more thing which needs to be considered and outlined precisely, is that the investors never really know when the asset is losing its value. 

Price variability

The FMA is the legal authority responsible for the regulations and initiatives in the crypto market. It is the representative authority, which has also recently commented on the Bitcoin price variability and once again outlines the potential risk it brings to the investors and traders. The price variability became even more vivid, when the crypto asset’s value showed up to be quite volatile, and jumped to the all-time high prices, despite the global economic crisis and pandemic. These drastic fluctuations have led the financial authority of New Zealand to recent advice, and warning signs for the underwater rocks, when trusting and further investing in Bitcoin in general. 

Not only the price of Bitcoin is unpredictable in the short-term, but it is also considered to be one of the riskiest assets to invest in. The Financial analysts and experts can accurately predict the possible price changes of the currencies or even stocks. This is possible by analyzing the outsource data all around the world. With Bitcoin, this is simply impossible. There is a very small chance you can really say what shall the cost for the Bitcoin be tomorrow or the day after. Among the factors that contribute to the intense price, variability is the large volume of exchange trading, the integration of Bitcoin with many big companies, the legislative initiatives of regulatory bodies from different countries, and some more disregarded factors. 

Moreover, Bitcoin and other crypto-assets are actively being integrated into many platforms and different industries. One of them is gambling. The online gambling industry is flourishing all over the world, and the popularity of the Bitcoin casino and Bitcoin games is also increasing at a rapid speed. The contribution of the Bitcoin gambling sites for NZ players to the popularity of the cryptos and especially Bitcoin is impressive, as online gambling is one of the best ways to promote crypto usage while offering some of the greatest benefits to the players. These kinds of factors are the safety and security of the transactions, as well as the comfort of the customers and their experience. This might not be very appealing to the local financial authorities, this is a great opportunity for the players. 

Consumer Protection

One more fact, which the FMA uses for its own advantage is the lack of a customer protection policy when it comes to crypto transactions and generally crypto trading. Unlike band transactions and other types of investments, crypto transactions do not provide customer protection service. This is mainly due to the fact that the crypto transaction happens between two individuals directly, similarly to the cash exchange. While the transactions are anonymous and guarantee privacy, in case the transaction is made by mistake it is only up to the second person to give your money back and make the transaction. There is no legal border or legislation which shall insist on the second party returning the funds. 

There is no immediate guarantor and thus, the irreversibility of the transaction may be the same disadvantage as the advantage in some cases. While this might not be a big deal for many investors, it is still something to keep in mind if you are a beginner in the business. 

Currency regulation

There is no official or one specific guideline or legislation for the global crypto market, which is allowing or on the opposite limiting users of proceeding with an action. The regulations vary according to the country and the local regulators. The absence of a well thought and unified system for regulating cryptocurrencies only increases the uncertainty factor regarding their future. Though, on the other side, this is exactly what cryptocurrency users value the most when it comes to preferences. The growth of the popularity of crypto investments is determined by the freedom of action in the crypto market. Bitcoin users love the fact that there is no official and legal regulator involved in regulating the market. 

Moreover, it is very handy to stay in the shadow of the local financial regulators. Just like in the gambling industry. Players love to stay away from the bank and keep a clean banking history. With the crypto transaction, this is possible, while with the credit card payments this is definitely not an option. Especially when in many countries the governments have limited the usage of credit cards as the payment method for gambling purposes.

With the growth of the popularity of cryptocurrencies, state structures are beginning to actively come up with various legislative initiatives that in one way or another regulate the turnover of Bitcoin and other similar currencies as in New Zealand. At the same time, government agencies in many countries are concerned about using Bitcoin for speculation, money laundering, drug trafficking, and other illegal financial transactions. 

Virtual Currency Frauds

Risk is present in almost every single industry and transaction, thus the risk in the financial transaction with cryptos, the risk is a normal thing for the users. The potential for the investors is valued way more than the probability of the risk. When there is no official person behind the buy and sell offers in the crypto market, there is no extra time to spend on thinking. The risk is associated with both real currency transactions and exchange trading. 

The FMA is not the only regulatory authority, which is actively engaged in warning people of staying away from crypto trading. The FMA has joined the UK’s financial authority FCA to warn the investors about the potential risks associated with investing in the crypto assets. New Zealand’s financial regulator warns the users of investing in Bitcoin and outlines the inability to help in case of any illicit activity. 

Only a few days ago the financial authority of the UK, the Financial Conduct Authority, also known as FCA, also made an announcement, warning the investors of the potential jeopardy of the digital investment process. The US’s financial market watchdog pointed out the uncertainty and the risky nature of the crypto industry. The authority also highlighted that the investors should be prepared for the worst-case scenario, which might result in losing money. 

With this, the FCA has made a step forward in further enhancing the security for the investors by setting cryptocurrency firms working in the country to register as approved establishments. The UK authority also prolonged the deadline for the existing crypto firm registration, until the middle of the June of this year, which was previously set to be the 10th of January. 

Preparing For Bad Closings

As the FMA and FCA warn locals the investors have to be very attentive and very careful when it comes to investing a solid amount of money in cryptos. The action is very risky and volatile. 

The reports say: “The FMA shares the FCA’s (Financial Conduct Authority) concerns that some crypto exchanges are promising high returns and customers should be prepared to lose all of their money.”

One more reason to be especially careful and attentive is that just like in many other countries, cryptocurrencies are not regulated in New Zealand. Though, as a backup plan, the local financial authorities strongly advise that the investors who still want to invest in the digital assets should at least have close coordination with the exchange registered in the Financial Service Providers Register (FSPR). Also, the last word by the FMA spokesperson was to check if the exchange accepts the NZD and is the trustworthy place to store your money with the local account.