Cryptocurrency leads to risks, Sri Lanka Central bank states

On Friday, April 9, the Central Bank of Sri Lanka published a notice regarding risk involvement in cryptocurrency investments. According to CBSL, trading with digital assets like Bitcoin, Ethereum, and Litecoin is associated with high risks. It is because there are no regulations concerning crypto investment and usage in the country.

The Central Bank of Sri Lanka highlights three types of crypto activities: trading via cryptocurrency exchanges, cryptocurrency mining, and investment in initial coin offerings. There are no regulatory safeguards for crypto activities in Sri Lanka. It means that all these crypto-related activities could cause significant risks for investors.

The Central Bank of Sri Lanka notes four major areas people need to consider before getting into cryptocurrency

The first major risk is due to the lack of any specific legal regulatory. The government cannot assist the investors regarding to their investment-related issues since there is no regulative recourse.

Second, cryptocurrency value’s high variability causes general distrust in the country. It made the bank warn traders against their vulnerability to possibly significant financial losses.

Third, as the CBSL states, many cryptocurrency activities associate with criminal activities, like financing terrorism or laundering money. In recent years, The Financial Action Task force has recognized Sri Lanka’s efforts to regulate money-laundering risks. The country also tries to ensure its removal from a “grey list” of problematic jurisdictions.

Because of Sri Lanka’s strict Foreign Exchange Regulations, the CBSL considers trading with virtual currency as traders’ potential violation. It is the last fourth warning the bank stated.

The Foreign Exchange Act No. 12 on 2017 does not allow the virtual currencies as an investment category. Thus, purchasing digital assets from abroad already means a violation of the law. Foreign currency payment related to virtual currency transactions do not accept Debit/Credit cards too.

However, it is not the first time the Central Bank of Sri Lanka has urged people about cryptocurrencies’ risks. The bank made a similar announcement back in April 2018 as well.

The CBSL also noted that no company could obtain any authorization to operate schemes involving virtual currency.

Meanwhile, in July 2020, the CBSL selected three companies to develop a blockchain-based proof-of-concept for its KYC system. The blockchain solution could help the financial sector to deal with Know Your Client challenges.