Sri Lanka’s central bank warns public against risks of crypto investment

The central bank listed four chief concerns, including the lack of legal recourse in the event of investor disputes and possible violations of foreign exchange regulations when purchasing crypto from abroad.

Sri Lanka’s central bank has taken the 2021 crypto bull market as an opportune time to warn the public against the risks associated with cryptocurrency investments.

In a public notice published on April 9, the Central Bank of Sri Lanka, or CBSL, flagged up three types of crypto activities: cryptocurrency mining, investment in initial coin offerings and trading via cryptocurrency exchanges. All these, CBSL warns, expose investors to significant risks. As there are no regulatory safeguards in place for crypto activities in Sri Lanka, the institution has identified four main areas of concern for retail investors getting into cryptocurrency.

The first involves the lack of any specific legal or regulatory recourse for investors in the case of issues or disputes related to their investments. Second, a broad distrust of the high volatility of cryptocurrency value has led the bank to warn traders against their exposure to potentially large financial losses.

Third, the CBSL asserts that there is a high likelihood of cryptocurrencies being associated with criminal activities, including terrorism financing and money laundering. Sri Lanka has, in recent years, been recognized by the Financial Action Task Force for its efforts to crack down on money laundering risks, and secured its delisting from a so-called “grey list” of problematic jurisdictions.

The last warning, specific to foreign exchange regulations in Sri Lanka, entails traders’ potential violation of the country’s Foreign Exchange Act. The bank states: 

“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). Electronic Fund Transfer Cards (EFTCs) such as debit cards and credit cards are also not permitted to be used for payments in foreign currency related to virtual currency transactions, in terms of the Foreign Exchange Regulations in Sri Lanka.”

As previously reported, while the CBSL may be wary of decentralized cryptocurrencies, it has nonetheless initiated a national project to test their underlying technology, blockchain, for its potential to improve  Know Your Customer data sharing and management.