Risks Of Cryptocurrencies, Initial Coin Offerings And Other Digital Tokens

Risks Of Cryptocurrencies, Initial Coin Offerings And Other Digital Tokens
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Key Takeaways

  • Cryptocurrencies are not regulated by the Monetary Authority of Singapore (MAS) as they are not legal tender

  • Be aware of the risks of Initial Coin Offerings (ICOs)

What Are Digital Tokens, Cryptocurrencies And ICOs

A Digital Token is a cryptographically-secured representation of the token-holder’s rights to receive a benefit or to perform specified functions.

Tokens are a string of computer codes. They are usually issued in pairs as public and private keys.

Digital Tokens are typically marketed:

  • As a means to pay for goods or services. This type of token is commonly called a cryptocurrency although it is not a “currency” issued by any government. It is also known as a "digital payment token". Examples include Bitcoin and Ethereum.

  • As a money-making opportunity. This could be an opportunity to participate in a new technology business and/ or receive future returns. This type of token is commonly called an Initial Coin Offering or ICO.

How An ICO Works

An ICO is a public sale of a new Digital Token.

Sellers typically set out their business proposals in a “white paper” with claims such as:

  • Raising funds to develop a new blockchain-based, decentralised platform

  • Providing exciting opportunities to invest in technology, business or assets

  • Exchanging for attractive benefits or monetary returns

  • Paying for goods and services offered on the platform

  • Appreciation of token value over time due to reasons such as limited number of tokens

Buyers typically pay for the new tokens by transferring commonly transacted cryptocurrencies e.g. Bitcoin or Ether, to a wallet address provided by the seller. Buyers may also be able to pay for the new tokens by transferring fiat currency to a bank account provided by the seller.

Risks Involving Digital Tokens

Cryptocurrencies are not regulated by MAS. They are not legal tender or securities. Persons that buy or sell cryptocurrencies or facilitate the exchange of cryptocurrencies may be regulated under the Payment Services Act 2019 for money-laundering and terrorism financing risk only.

Offers of Digital Tokens that are securities may be regulated or exempted under the Securities and Futures Act, e.g. if they are offered to accredited or institutional investors only, or are exempted small offers and private placements. These exemptions come with specific conditions such as advertising restrictions.

Here are some risks involving Digital Tokens which you should be aware of:

  • Foreign and online operators. It is difficult to trace and verify the authenticity of the operator of schemes that are run online or outside Singapore. If the scheme fails, you could lose all your investments.

  • Sellers without a proven track record. Establishing the credibility of token sellers could be hard. As with all start-ups, the failure rate tends to be high.

  • Insufficient secondary market liquidity. Even if the tokens can be traded in a secondary market, you may be stuck with them if there are not enough active buyers and sellers. Or if the bid-ask spreads are too wide.

  • It is possible to lose every cent. The value of Digital Tokens is usually highly speculative and not transparent. The traded price can fluctuate greatly in a short time and can become zero overnight.

  • Investments promising high returns. Be wary. Investments with higher promised returns come with higher risks and could potentially be fraudulent. Schemes that offer high referral commissions would increase operating costs which could lower the chances of achieving the promised returns.

  • Money-laundering and terrorist financing. Funds invested into ICO schemes carry a higher risk of being misused for illegal activities due to the pseudo-anonymous nature of the transactions. Investors are likely to be adversely affected if authorities investigate any alleged illicit activities related to the token issuer, its business activities, or the trading of the token.

  • Risk of losing private key. If you lose your private key, you lose access to your Digital Tokens. If someone hacks into your digital wallet or otherwise knows of your private key, that person gains access to your Digital Tokens.

Is It Regulated?

There is no legislative protection. Remember, MAS will not be able to help you in any way if you lose money from dealing with digital tokens that are not products regulated by MAS. This includes situations where the digital token service is provided by an entity regulated by MAS, but where the digital token is not regulated by MAS.

If you choose to deal with an unregulated person or entity or invest in unregulated products, you will not be protected under MAS regulations. If you suspect that an investment scheme involving Digital Tokens could be fraudulent or is being misused for any illicit activity, you should report it to the police immediately.

As for cryptocurrencies, persons that buy or sell cryptocurrencies, or facilitate the exchange of cryptocurrencies may be regulated under the Payment Services Act 2019. However, they are not required to protect your cryptocurrency and are not required to ensure that each cryptocurrency transaction is processed properly. MAS regulates cryptocurrency service providers under the Payment Services Act 2019 mainly for money-laundering and terrorism financing risk only.

Note: Be wary of fraudulent websites soliciting cryptocurrency investments by using fabricated comments attributed to prominent public personalities. MAS and the Commercial Affairs Department have issued several advisories warning of such incidents.

If you suspect that an investment offer could be fraudulent or misused for other unlawful activities, report it to the Police.

Checklist

Protect Yourself

Before making any investment decision:

  • Seek financial services from persons or entities that are regulated

  • Make sure you fully understand the benefits and risks of the product or service before committing

  • Assess whether the product or service meets your needs

Always:

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