Sri Lanka’s central bank appears to have taken the 2021 crypto bull run as an ideal time to warn its public against the risks that come with crypto investments. The bank listed four major concerns, including possible violations of foreign exchange regulations whenever buying crypto from abroad and lack of legal recourse in the case that investors have disputes.
In an April 9 public notice, the Central Bank of Sri Lanka (CBSL) flagged up 3 types of crypto activities: investment in initial coin offerings (ICO), crypto exchanges, and trading through crypto exchanges.
According to CBSL, all these factors expose investors to significant risks. Since there are no regulatory safeguards out in place for crypto activities in Sri Lanka, the institution has identified four key areas of worry for retail investors getting into crypto.
The first features the lack of any particular legal or regulatory recourse for the investors in the case of disputes or issues related to their investments. Second, a major distrust of the high volatility of crypto value has made the central bank warn traders against their exposure to possibly huge financial losses.
Thirdly, the CBSL insists that there is a major possibility of cryptos being used for criminal activities, like money laundering and terrorism financing. In recent years, Sri Lanka has been recognized by the Financial Action Task Force (FATF) for its relentless efforts to crack down and eliminate money laundering risks. It also secured its delisting from a so-called ‘grey list’ of problematic jurisdictions.
The central bank’s last warning was directed to foreign exchange regulations in Sri Lanka. It entailed traders’ possible violation of the country’s Foreign Exchange Act. The bank says:
“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.”
Based on previous reports, while the CBSL might be wary of decentralized cryptos, it has nevertheless initiated a national project that tests its underlying technology, blockchain. It tests blockchain’s potential to enhance Know Your Customer (KYC) data management and sharing.