SEC offers informal crypto risk analysis

Posted: 23 February 2018 5:00 pm

Cryptocurrency-related investment markets are very different than other regulated securities markets.

Should you or shouldn’t you buy the latest cryptocurrency or token? This is one of the most common questions posed to one of the leading officials at the United States’ Securities and Exchange Commission (SEC).

SEC office of investor education and advocacy director Lori Schock decided to answer these queries in an informal post published via the US regulator’s online consumer investment resource

As part of her response, Schock acknowledged that many people, from millennials to seniors, were interested in discovering more about bitcoin and other cryptocurrency-related investments and trading schemes.

Schock revealed that at a recent investor education program at a retirement community, a woman said, “My children keep telling me I need to hurry up an invest in bitcoin — is it safe, have I already missed the boat?”

“Perhaps the most important thing to know is the cryptocurrency-related investment markets are very different than our regulated securities markets,” Schock said. “For example, our securities laws provide important protections that you may not be getting when dealing in cryptocurrency-related investments.”

Schock added that, in many cases, the proprietors, location of funds and potential returns are unknown.

Earlier this month, the SECs Office of Compliance Inspections and Examinations (OCIE) published its annual list of priorities, after SEC chairman Jay Clayton fielded questions concerning the oversight role of US regulators with regards to virtual currencies at an open session Senate Committee hearing in Washington D.C.

OCIE plans to monitor the growth of digital currencies and initial coin offerings (ICOs), while examining registrants involved in offers and sales to ensure investors receive adequate disclosures about associated risks.

This systematic strategy may reveal answers to some of the questions posed by the Senate Committee during the hearing — in particular queries put forward by Senator Jack Reed concerning financial systemic risks.

Trendy investments are especially ripe for fraudsters

Digital assets have been trending lately and receiving the attention of celebrities, often through endorsements. One obvious example is American film actor Steven Seagal’s recent advocacy of controversial Bitcoiin token.

“Never make an investment decision based solely on celebrity endorsements. Just because your favorite celebrity says a product or service is a good investment doesn’t mean it is. Always do thorough, independent research of the product,” Schock said.

The SEC director added that scammers prey upon the newness of an investment opportunity when there isn’t as much history about the product. Schock warned that it’s also easier to sell an investor on an “everyone is buying it” sales pitch when there’s plenty of hype and buzz surrounding a particular investment product.

“The pressure to buy the product right away mounts,” Schock said.

“Don’t fall for high-pressure sales tactics, the promise of guaranteed returns or too good to be true claims… take time to make the right investment decision for you. Ask questions and demand clear answers.”

The SEC provides sample questions, such as “Who exactly am I contracting with?”, “What will my money be used for?” and “What specific rights come with my investment?” in its cryptocurrencies and ICOs breakdown.

“You should understand if you lose money there is a real chance the SEC and other regulators won’t be able to help you recover your investment, even in cases of fraud,” Shock warned potential cryptocurrency buyers.

“A good rule of thumb when investing in a new product is to only invest money that you are willing to lose, so that it’s not financially devastating if the investment doesn’t pan out. One way to spread risk is to diversify your investments. Don’t put all of your eggs in one basket. That way, if one of your investments loses money, the other investments can make up for it.”

Other cryptocurrency-related developments

Bank of America has expressed its concerns over the costs and risks associated with increased competition it faces from cryptocurrencies and the various businesses, exchanges and technologies that support them.

In a staff letter distributed in January, the SEC advised that cryptocurrencies and related products pose “significant investor protection issues” and, for now, cannot be offered as exchange-traded funds (ETFs).

In November last year, the SEC posted an investor alert issuing a caution to potential investors seeking an “easy payday” by purchasing or signing up for paid-to-click memberships and advertising product packs.

Leading financial regulation authorities in the United States and United Kingdom have partnered to collaborate on a range of studies that will focus on advances within the burgeoning financial technology (fintech) industry.

You can learn all about different exchanges, understand exactly how to buy and sell cryptocurrencies, calculate your taxes, discover digital wallets to hold assets and explore a list of all the alternative coins on the market.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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