On January 4, 2017, the North American Securities Administrators Association (NASAA) released a reminder for cryptocurrency investors "to be cautious about investments involving cryptocurrencies." Joseph P. Borg, president of NASAA and director of the Alabama Securities Commission, further stated, "Investors should go beyond the headlines and hype to understand the risks associated with investments in cryptocurrencies, as well as cryptocurrency futures contracts and other financial products where these virtual currencies are linked in some way to the underlying investment."
The NASAA statement highlights several of the conundrums that regulators like the Securities and Exchange Commission (SEC) must confront when seeking to exercise their legal mandates for cryptocurrency, such as associated tangible assets, controls by regulators or governmental authorities, and reliable methods of exchange for other commodities. These concerns were reinforced by the results of a NASAA survey that found 94 percent of the included state and provincial securities regulators believed that cryptocurrencies involve a "high risk of fraud."
The publication prompted a reply from the SEC, part of which read, "The [NASAA] release recognizes that cryptocurrencies, while touted as replacements for traditional currencies, lack many important characteristics of traditional currencies, including sovereign backing and responsibility, and now are being promoted more as investment opportunities than efficient mediums for exchange."
Borg went on to say, "The recent wild price fluctuations and speculation in cryptocurrency-related investments can easily tempt unsuspecting investors to rush into an investment they may not fully understand. Cryptocurrencies and investments tied to them are high-risk products with an unproven track record and high price volatility. Combined with a high risk of fraud, investing in cryptocurrencies is not for the faint of heart."
Previously, NASAA created a short video that animates the risks associated with token offerings and cryptocurrencies more generally.
Below are the reminders of "common cryptocurrency concerns" as well as "common red flags of fraud," which were applauded by the SEC.
Common Cryptocurrency Concerns
- "Cryptocurrency is subject to minimal regulatory oversight, susceptible to cybersecurity breaches or hacks, and there may be no recourse should the cryptocurrency disappear.
- Cryptocurrency accounts are not insured by the Federal Deposit Insurance Corporation (FDIC), which insures bank deposits up to $250,000.
- The high volatility of cryptocurrency investments makes them unsuitable for most investors, especially those investing for long-term goals or retirement.
- Investors in cryptocurrency are highly reliant upon unregulated companies, including some that may lack appropriate internal controls and may be more susceptible to fraud and theft than regulated financial institutions.
- Investors will have to rely upon the strength of their own computer security systems, as well as security systems provided by third parties, to protect purchased cryptocurrencies from theft."
Common Red Flags of Fraud
- "Guaranteed" high investment returns. There is no such thing as guaranteed investment returns, and there is no guarantee that the cryptocurrency will increase in value. Be wary of anyone who promises a high rate of return with little or no risk.
- Unsolicited offers. An unsolicited sales pitch may be part of a fraudulent investment scheme. Cryptocurrency investment opportunities are promoted aggressively through social media. Be very wary of an unsolicited communication—meaning you didn't ask for it and don't know the sender—about an investment opportunity.
- Sounds too good to be true. If the project sounds too good to be true, it probably is. Watch out for exaggerated claims about the project's future success.
- Pressure to buy immediately. Take time to research an investment opportunity before handing over your money. Watch out for pressure to act fast or 'get in on the ground floor' of a new tech trend."
- Unlicensed sellers. Many fraudulent investment schemes involve unlicensed individuals or unregistered firms. Check license and registration status with your state or provincial securities regulator."
NASAA provided a resource by which to contact your state's regulator.