the staff of the Ridgewood blog
Ridgewood NJ, With cryptocurrencies continuing to attract headlines, Attorney General Christopher S. Porrino and the Bureau of Securities, which is within the Division of Consumer Affairs, today reminded New Jersey investors to be cautious about investments involving cryptocurrencies.
“Cryptocurrencies may be the new rage when it comes to investments, but there are significant risks associated with transactions involving these predominantly unregulated currencies,” said Attorney General Porrino. “Investors should fully understand the types of currency and transactions being pitched to them before agreeing to invest.”
Cryptocurrencies are a medium of exchange that are created and stored electronically in the blockchain, a distributed public database that keeps a permanent record of digital transactions. Current common cryptocurrencies include Bitcoin, Ethereum and Litecoin. 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.
A survey of state and provincial securities regulators by the North American Securities Administrators Association (NASAA), of which the Bureau of Securities is a member, shows 94 percent believe there is a “high risk of fraud” involving cryptocurrencies. Regulators also were unanimous in their view that more regulation is needed for cryptocurrency to provide greater investor protection.
“Because of the high risk of fraud and some projections of huge returns, investors must be on alert and not be tempted to invest in cryptocurrency-related investments without first vigorously vetting any transaction,” said Sharon M. Joyce, Acting Director of the Division of Consumer Affairs. “Understanding what is being sold is the best armor an investor has against fraud.”
Last month, NASAA identified Initial Coin Offerings (ICOs) and cryptocurrency-related investment products as emerging investor threats for 2018. Unlike an Initial Public Offering (IPO) when a company sells stocks in order to raise capital, an ICO sells “tokens” in order to fund a project, usually related to the blockchain. The token likely has no value at the time of purchase. Some tokens constitute, or may be exchangeable for, a new cryptocurrency to be launched by the project, while others entitle investors to a discount, or early rights to a product or service proposed to be offered by the project.
“Transactions involving cryptocurrency are often complicated and confusing with an unproven track record. They are not designed for investors with a low tolerance for risk or volatility,” said Christopher W. Gerold, Chief of the Bureau of Securities. “The best advice we can give is for investors to be completely aware of the risks before investing and act accordingly.”
NASAA offers a short animated video to help investors understand the risks associated with ICOs and cryptocurrencies. NASAA and its members first alerted investors of the risks associated with cryptocurrencies in 2014.
Common Cryptocurrency Concerns
The following are some common concerns investors should consider before investing in any offering containing cryptocurrency:
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
The Bureau of Securities also reminds investors to keep watch for these common red flags of investment 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. The Bureau of Securities can help investors research the background of those selling or advising the purchase of an investment.