On Thursday, Jan. 4, the North American Securities Administrators Association (NASAA) released a warning for Main Street investors regarding the risks associated with cryptocurrencies and Initial Coin Offerings (ICOs).
The warning was promptly followed by a statement from the US Securities and Exchange Commission (SEC) that commended and reiterated the NASAA’s message.
The NASAA statement encouraged investors to look “beyond the hype” when considering cryptocurrencies and their derivatives, in order to better understand the associated risks.
Joseph P. Borg, NASAA President and Director of the Alabama Securities Commission, was quoted in the statement saying:
“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.”
Borg also noted in the statement that the volatile nature of the cryptocurrency market attracts new investors who are generally not well-informed about the nature of the investments they are making, stating:
“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.”
Common concerns and risks
The NASAA statement includes a list of common concerns associated with cryptocurrencies and warnings of high potential for fraud when investing in them.
The NASAA and the SEC made a point of describing how cryptocurrencies are different from “traditional”, or fiat, currencies. Both agencies noted that it is these very differences that make cryptocurrencies high risk. The NASAA statement reads:
“Unlike traditional currency, these alternatives have no physical form and typically are not backed by tangible assets. They are not insured or controlled by a central bank or other governmental authority, cannot always be exchanged for other commodities, and are subject to little or no regulation.”
Finally, the statement concludes with a list of five potential signs of fraud when investing in the crypto space. These fraud red flags include “guaranteed” high returns, unlicensed sellers, and high pressure to buy rapidly, all of which were arguably present in most ICOs in 2017.
United front?
The SEC affirmation of the NASAA statement -- along with the several other SEC statements on crypto and ICOs - is indicative of an increasing, concentrated focus on regulating the crypto space, particularly in the US.
As the cryptocurrency market continues to grow and public attention increases, the potential risks for new, uninformed investors will likely continue to spur on regulation and warnings from governmental authorities around the world.