In recent years, virtual currencies such as bitcoins - and the huge gains these digital tokens have achieved - have made headlines globally. They started as virtual currencies but some have evolved to involve investment schemes.
Before you rush in, you should heed the advice of financial experts and the authorities who are urging investors to understand the potential risks of these complex products.
On Thursday, the Commercial Affairs Department (CAD) and the Monetary Authority of Singapore (MAS) warned retail investors not to throw caution to the wind when dealing with such investment schemes. They noted the emergence of an
initial coin (or token) offerings (ICOs), and other investment schemes involving digital tokens here. Some recent ICOs were TenX in June and Cross Coin last month.
Since 2015, a little over 100 police reports have been filed here involving five such investment schemes. And since January last year, the Consumers Association of Singapore (Case) has received five complaints about digital currencies, such as Bitcoin. The complaints focused on the lack of payouts after investing or unsatisfactory services.
The consumer advisory follows a recent clarification from MAS on its regulatory stance on digital tokens. MAS had said that the current securities regulatory framework requires that any offering of shares, debt instruments, or units in a collective scheme will have to comply with prospectus requirements, or exemption requirements (if any are applicable).
Singapore University of Social Sciences (SUSS) Professor David Lee said he has invested in digital tokens not to get good returns, but to learn and be involved in the digital token community. He declined to disclose the sum he had invested.
Besides hoping for high returns through appreciating token prices, advocates of digital tokens see the new technology as an enabler of the growth of community projects, particularly in areas where financial services infrastructure is lacking. Others like the transparency and liquidity opportunities.
Like any investment product, it is prudent to understand it first. When sellers of digital tokens fail to highlight the risks, consumers should make the effort to find out more information about the underlying project, business or assets. Look out for these eight risks.
1. FOREIGN AND ONLINE OPERATORS
The CAD and MAS warned that you are exposed to a heightened risk of fraud when investing in schemes that operate online or outside Singapore as it would be difficult to verify their authenticity.
2. SELLERS WITHOUT A PROVEN TRACK RECORD
Sellers of digital tokens may not have a proven track record, making it hard for one to establish their credibility. As with all start-ups, the failure rate tends to be high.
3. INSUFFICIENT SECONDARY MARKET LIQUIDITY
Even if digital tokens are tradable in a secondary market, in practice, there may not be enough active buyers and sellers or the bid-ask spreads may be too wide. This means you may not be able to exit your token investments easily.
4. HIGHLY SPECULATIVE INVESTMENTS, PRICE VOLATILITY
The valuation of digital tokens is usually not transparent and is highly speculative. Transparency could be limited as there might be little publicly available information that could help you gauge the fair value of the virtual currency.
There is a high risk that you could lose a portion or your entire investment amount. In the worst-case scenario, the digital tokens could be rendered worthless.
5. INSUFFICIENT SECURITY PRECAUTIONS
The platforms or persons you deal with may not have taken enough security precautions and this could lead to theft through hacking.
6. FRAUD AND SCAMS
Fraud has also occurred in relation to companies that claim to offer virtual currency payment platforms and other virtual currency-related products and services.
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