Many people see cryptocurrency primarily as an investment tool, leading some to include it in their retirement savings plans. In response, the US Securities and Exchange Commission (SEC) issued an announcement cautioning investors to do their homework when putting digital assets in their self-directed individual retirement accounts (IRAs).
According to the SEC's August 8 warning, a self-directed IRA differs from more traditional retirement accounts in that the holder of the account may be permitted to invest in alternative assets such as real estate, tax lien certificates, and digital currency. Unlike other types of IRAs, the holder is responsible for validating the legitimacy of the investment, while the account custodian is only responsible for holding and administering assets.
Specifically, the commission warns about using a self-directed retirement fund to invest in cryptocurrency for several reasons, not least because crypto prices are unstable and unpredictable.
The cryptocurrency market is continually evolving, which makes predicting price trends tricky. That being the case, investors that load up their self-directed IRA with cryptocurrency could find their retirement fund insufficient to support their lifestyle when it comes time for them to retire and live the good life.
For example, in the month leading up to the publication of the SEC's warning, Ether prices dropped by approximately 12 percent, and the price of bitcoin declined by almost 13 percent. To further illustrate this point, at its peak, bitcoin was worth almost $20,000; Ether was worth almost $1,500.
The commission also cautioned investors against investing heavily in digital assets for their retirement because many initial coin offerings (ICOs) and other digital assets may be fraudulent.
The SEC does not imply that investors should not invest in digital currency. Nor does it claim that all ICOs are fraudulent. Rather, it lays out some guidelines for investors to help them avoid fraud. The commission states:
"While it is possible that digital assets may provide fair and lawful investment opportunities, they may also be conducted without SEC registration or a valid exemption from registration, and may not provide complete or accurate information to aid investors in making informed decisions. In addition, many of the trading platforms for these digital assets refer to themselves as "exchanges," which may give investors the misimpression that they are regulated by the SEC."
To avoid being taken advantage of, the SEC urges those who hold self-directed IRAs to do their homework and verify all important investment information themselves, ask a lot of questions, and be wary of "can't miss" opportunities: If it sounds too good to be true, it probably is.
Fraudulent ICOs are nothing new to savvy crypto investors and regulators. In Operation Cryptosweep, state and provincial members of the North American Securities Administrators Association (NASAA) targeted approximately 70 different fraudulent ICOs and crypto-related investments. In July, the Internal Revenue Service Criminal Investigation announced the formation of an international tax enforcement supergroup with a special focus on cryptocurrency-related crimes. Later last month, President Donald Trump issued an executive order to establish the Task Force on Market Integrity and Consumer Fraud. Digital currency fraud was specifically mentioned as an area of interest.