Risks of cryptocurrencies, initial coin offerings and other digital tokens
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 cryptocurrencies although it is not a “currency” issued by any government. Examples include Bitcoin and Ether.
• 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. Buyers typically pay for the new tokens by transferring commonly transacted crypto currencies 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.
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.
• Tokens that can be used to exchange for attractive benefits or monetary returns.
• Tokens that can be used to pay for goods and services offered on the platform.
• Appreciation of token value over time due to reasons such as limited number of tokens.
Risks involving digital tokens
Cryptocurrencies are not regulated by MAS. They are not legal tender or securities. 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 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 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.
The Monetary Authority of Singapore(MAS) has reminded that Digital Token Exchanges and ICO Issuer should monitor and comply with MAS’ regulations as following:
① Singapore, 24 May 2018, The Monetary Authority of Singapore (MAS) has warned eight digital token exchanges in Singapore not to facilitate trading in digital tokens that are securities or futures contracts without MAS’ authorisation.
It also warned an Initial Coin Offering(ICO) issuer to stop the offering of its digital tokens in Singapore.
② MAS has reminded the eight digital token exchanges to seek MAS’ authorisation if the digital tokens traded on their platforms constitute securities or futures contracts under the Securities and Futures Act(SFA).
Digital token exchanges commonly allow the buying and selling of digital tokens using fiat currency, and facilitate the exchange of digital tokens between their clients.
If the digital tokens constitute securities or futures contracts, the exchanges must immediately cease the trading of such digital tokens until they have been authorised as an approved exchange or recognised market operator by MAS.
③ MAS has directed an ICO issuer offering digital tokens to SGbased investors to stop doing so. MAS has assessed that the issuer had contravened the SFA as its tokens represented equity ownership in a company and therefore would be considered as securities under the SFA.
The offer was made without a MAS-registered prospectus, which is a SFA requirement. The issuer has ceased the offer and has taken remedial actions to comply with MAS’ regulations.
Monetary Authority of Singapore (MAS)