Consumer advisory for cryptocurrencies and ICOsby
In light of the current market interest in cryptocurrencies and initial coin offerings, it is opportune for ACCESS to provide the following consumer advisory.
Investors should remember that volatility is a two way street. Market pricing for cryptocurrencies could also fall as quickly as they move up.
Before investing in cryptocurrencies, prospective investors should ask themselves:
- What is your risk appetite? Cryptocurrencies may be more volatile than other investment products.
- Do you understand the risks of investing in cryptocurrencies?
- What is your investment objective?
- What is your investment horizon?
- Have you done your research on the cryptocurrency you are purchasing?
- Do you understand factors that may affect the market value of your cryptocurrency investment?
- How much of your assets are you allocating to cryptocurrency investments.
- Are you prepared to write off your cryptocurrency investments substantially or completely?
- Do you understand the processes involved in liquidating your cryptocurrency holding?
- What is the reputation of the cryptocurrency exchange you using?
Initial Coin Offerings
Initial coin offerings are offered by companies to the public, who are interested in supporting the enterprise.
On their part, purchasers should find out what underlying rights the tokens are offering them. This is typically set out in a white paper on the terms and conditions of the offer.
If the tokens offer some form of securities (eg rights similar to that if shares, bonds or collective investment schemes), the issuer of the tokens must have a prospectus which is lodged with the MAS. If there is no prospectus that has been properly filed with the MAS, the offer of securities may be an illegal one and could give rise to a criminal offence.
If the coins do not offer securities, but offer some other underlying rights to services, goods or utility, it is largely unregulated by MAS. It would still be prudent for an investor to find out from the white paper, or from their own due diligence, how the company intends to use the proceeds from the ICO.
Investors should ask if they understand the business (or intended business) of the company, whether the promoters of the company are credible, the quality of the company’s advisers, if the company has (or intends to have) a physical presence in Singapore, and whether it has a track record here.
The white paper issued by the token issuer should properly disclose the identities of the promoters and advisors, the nature of the core business of the company, information on the rights of purchasers of the tokens (and whether they are securities), how the company intends to use the proceeds of the token offering, whether the tokens are listed on the exchanges (allowing token purchaser to liquidate their tokens), how many tokens the company is issuing and other salient information (including risks). A token purchaser should also be able to contact representatives from the ICO issuer.
An ICO issuer should also conduct Customer Due Diligence or Know Your Client checks on you. This is part of their obligations to abide by anti-money laundering and anti-terrorist financing laws.
If the company is located out of Singapore, there may be practical legal difficulties in taking legal action against the company, or enforcing judgement against it.
On their part, token purchasers should ask themselves:
- What is your risk appetite? Tokens carry significant risks and may be more volatile than other investment products.
- What is your investment horizon?
- Are you prepared to write off the token purchasers substantially or completely?
- Have you read the White Paper and terms and conditions of the sale? Do you understand them?
- Do you understand the core business of the token issuer?
- Do you understand the business risks of the token issuer?
Nizam Ismail, Head of Regulatory Sub-Committee, ACCESS