Published: 05.04.2022

Emīls Dārziņš, Head of the Payment Systems Policy Division of the Payments Systems Department, Latvijas Banka

We regularly hear about cryptocurrencies (bitcoin, ethereum, ripple, dogecoin, etc.) in a wide variety of situations. Phone fraudsters call people and "catch" the credulous ones, promising them massive profits if they entrust money to the callers for investment in cryptocurrencies; in the shadow of global distress, investors look for a safe haven for their investment, and the value of cryptocurrencies is more volatile than before; Russia mentions cryptocurrencies as a possible option to circumvent the sanctions imposed by Western countries on its financial system in response to the barbaric attack on Ukraine. Moreover, the platforms selling cryptoassets try, on their own initiative, to combat this practice (e.g. the platform Coinbase froze accounts of 25 000 Russian users). 

The survey conducted by SIA Latvijas Fakti in February 2022 also confirms that awareness of Latvia's population of cryptocurrencies is rising, i.e. 89% of the population have heard about such currencies (77% a year ago), but 8%, which is twice as much as in 2021, have acquired or purchased them.

Awareness does not necessarily mean literacy. One question is still open – how many of those who have started, or intend, to deal with cryptocurrencies understand that a cryptocurrency is not money by nature but a volatile and risky asset. This is a crucial aspect, and the survey by SIA Latvijas Fakti confirms that cryptocurrencies are increasingly used for investment rather than payments. In February 2022, only 12% of those surveyed dealing with cryptocurrencies said they had used them for payments, but 80% of the respondents had not used cryptocurrencies for this purpose. Just a year ago, cryptocurrencies were employed by 19% of the users but in 2020 – by 24%.

What should one know when dealing with cryptocurrencies? Here are some suggestions to be considered.

  • First of all, one should understand the nature of cryptocurrencies and the principles of their purchase, bearing in mind that they cannot be purchased simply by making a phone call. By learning simple fundamental principles we expose ourselves to a substantially lower risk of being cheated.
  • There are different types of cryptocurrencies, and the principles of their acquisition may vary considerably. Therefore, if you decide to invest in one of the cryptoassets, it has to be scrutinised. Historical evidence suggests that the pyramid or Ponzi schemes have been referred to as cryptoassets, and architects of these schemes have vanished together with investors' funds.
  • A very wide range of factors can affect the price of cryptocurrencies therefore their value is highly volatile. National political decisions, announcements by large firms and public personalities can significantly and rapidly affect the value of cryptocurrencies (e.g. in 2021, Elon Musk came up with several contradictory announcements concerning the acceptance of cryptocurrencies when paying for a Tesla electric car, and each such case triggered significant market fluctuations).
  • A large part of cryptocurrency transactions is easily traceable in the blockchain, and anyone who knows the address of the wallet can check its content and see the transactions undertaken. Thus, if somebody tells you that he/she has transferred money to your wallet, you can check it easily.
  • Keep your private keys to cryptowallets in as many and different secure places as possible. When the key is lost, you lose access to your wallet and thus your cryptoassets.
  • Finally, one should bear in mind that the use of cryptoassets as an investment instrument involves the compliance with the obligation imposed by the State Revenue Service to pay the personal income tax of 20% of the profits made into the central government budget.

In conclusion, I would like to invite you to familiarise yourself with the analysis carried out by Kristīne Petrovska on global trends in supervision of cryptocurrencies, as well as econometric modelling of their spread in Latvia (both articles are available in Latvian only). The main conclusions are as follows:

  • overall, Latvia's population shows relatively little interest in cryptoassets, it arises occasionally and in some regions;
  • payments made to top up cryptowallets are similar to gambling payments;
  • investment by Latvia's population in cryptoassets is closely linked to the bitcoin price;
  • on a global scale, capitalisation of the cryptoasset market has increased to 2 trillion euro or about 280 euro per person on Earth since 2020;
  • supervisors of financial markets in Europe, the USA and elsewhere do not lag behind these developments: they offer a crypto surveillance framework that will include the same requirements as those applicable to comparable assets at banks.