• wblogo
  • wblogo
  • wblogo

MAS warns against investment schemes involving digital tokens

Chris Hamblin, Editor, London, 10 August 2017

articleimage

The Monetary Authority of Singapore, alongside the island-republic's Commercial Affairs Department, is advising investors to 'exercise due diligence' to understand the risks associated with initial coin offerings and investment schemes involving digital tokens.

The MAS defines a 'digital token' as a cryptographically-secured representation of a token-holder’s rights to receive a benefit or perform specified functions. Virtual currency is one example of it. Its 'advisory' (US terminology for a non-legally-binding pronouncement) is interesting in that it contains many of the misgivings that regulators all over the world are likely to have about such schemes.

Risks relating to foreign and online operators. All regulators believe that consumers run the risk of fraud when investing in schemes that operate online or outside their jurisdictions. This is because they treat other regulators as suspect in verifying authenticity. When schemes collapse, it is difficult for people in the jurisdiction to trace the operators. The recovery of invested monies may also be subject to foreign laws or regulations, which differ from those of the home state.

Risks relating to sellers with no proven track records. The seller of digital tokens may not have a proven track record, making it hard for consumers to establish its credibility. As with all start-ups, the failure rate tends to be high.

Risks relating to insufficient secondary market liquidity. Even if digital tokens are tradeable on a secondary market, there may not be enough active buyers and sellers for this to be of much use. Likewise, the bid-ask spreads may be too wide. Consumers may not be able to jettison their token investments easily. In the worst instance, where no secondary market develops, a consumer may not be able to 'liquidate' the tokens he holds at all. The exchanges or platforms that facilitate the secondary trading of digital tokens may not be regulated by the MAS.

Risks relating to highly speculative investments. The valuation of digital tokens is an opaque business and a highly speculative one. When digital tokens do not hold any ownership rights to the seller’s assets, the digital tokens are not backed by any tangible asset. Such tokens would be merely speculative investments and their traded price can fluctuate greatly within a short period of time, making it quite possible that a consumer could lose his entire investment amount. Indeed, the digital tokens could become worthless. All investors know this, but it troubles regualtors mightily.

Risks relating to investments promising high returns. Regulators rightly wish to protect vulnerable (perhaps elderly) consumers from investment schemes involving digital tokens that promise high returns. The higher the promised returns, the higher the risks.  High returns could come in the form of high referral commissions, i.e. promising consumers benefits for referring additional participants. In fact, the MAS warns, such commissions would increase operating costs, which could lower the chances of achieving the returns.

Risks involving money laundering and terrorist finance. This is something about which normal investors do not worry but governments, largely out of a desire to track every citizen's movements, do care about them, perhaps more than they care about anything else on this list.

Funds invested into investment schemes involving digital tokens are prone to being misused for illegal activities due to the anonymity of transactions, and the ease with which large sums of monies may be raised in a short period of time. Beyond advising consumers to look at its website or ring the police if they suspect foul play, the regulators have the following list of steps they ought to take.

  • Understand the benefits and risks of the product or service fully before committing themselves.
  • Find out whether the features of the product or service on offer meet their needs.
  • Ask the seller as many questions as they need to understand the investment opportunity fully.
  • Check to see if the information they provide is true.
  • Verify the seller's (or its representative’s) credentials by using resources such as the MAS’s Financial Institutions Directory, Register of Representatives or Investor Alert List.

ICOs - a nod and a wink?

The typical initial coin offering starts off with the publication of a white paper and an alluring website. People who read the white paper can buy rights to the coin before it is traded actively. Enthusiasts for ICOs emphasise the point that such new tokens are not really meant to be stores of value. Indeed, the EOS main website states: "The EOS Tokens do not have any rights, uses, purpose, attributes, functionalities or features, express or implied, including, without limitation, any uses, purpose, attributes, functionalities or features on the EOS Platform." Other sites also state that the coins that they promote have no value, cannot be used as equities etc.

Many commentators, however, believe that the purpose of such disclaimers is to convince regulators that crypto-currencies are exempt from all securities laws, while leaving HNW investors to surmise that there actually is value to them and that they are merely disclaiming all pretentions to value to bypass the existing law. The EOS token sale generated more than US$185 million (£142½ million) in its first five days.

Fear of missing out

One motivation that many HNW investors have for investing in ICOs is that they worry that they will miss the opportunity to purchase the next great cryptocoin cheaply. As a consequence, there are very many serial coin purchasers around the world with an interest in ICOs, if not pre-ICOs; some are even trading the rights to tokens that have not gone on sale yet. Some commentators take such activity to be a typical sign that a bubble is about to burst, but the dollar values of cryptocurrencies are very prone to very high peaks and very low troughs. Bitcoin, for instance, was at US$13 (£10) a coin in 2013 before exploding in price to peak at US$1,242 (£957) per coin. The price subsequently crashed to around US$200 (£154) but is now again at an all-time high of US$3,482 (£2,683), having more than tripled in price this year.

One sage piece of advice that the regulators of Singapore are not giving out is to not be greedy. Any investor with a limited appetite for risk who has doubled or tripled the value of his tokens ought to cash them in with a clear conscience and not feel a sense of deprivation if they climb to even greater heights later; the alternative might be to lose most of his money by misjudging the timing of his coin sale.

Latest Comment and Analysis

Latest News

Award Winners

Most Read

More Stories

Latest Poll