US SEC cautions investors about crypto assets' securities risks

More than 46,000 people reported losing more than $1 billion in cryptocurrency frauds between the start of 2021 and June 2022. AFP

The US Securities and Exchange Commission on Thursday issued an official investor alert advising caution with crypto asset securities.

The regulator warned that businesses offering transactions involving crypto assets, including crypto asset securities, may not be complying with the US regulations.

It said the risk of loss for investors remained “significant”.

The only money investors should put at risk with speculative crypto investment is the money they can afford to lose entirely, it said.

Investments in crypto asset securities can be “exceptionally volatile and speculative” and the platforms where investors buy, sell, borrow or lend these securities may lack “important protections for investors”.

The cryptocurrency sector went through a troublesome year in 2022, marred by company collapses and cyber crimes, dragging the prices of digital assets and investor interest down.

One of the latest and most notable incidents was the collapse of FTX, which filed for bankruptcy on November 11.

The downfall of the exchange once valued at $32 billion rocked the entire industry and its founder Sam Bankman-Fried is facing criminal charges in the US.

The FTX crash also came at a time when the collapse of major companies Celsius Network and Three Arrows Capital after massive losses was still fresh in investors' minds.

The collapse of the Luna cryptocurrency and its associated Terra stablecoin in May, as well as job losses, have added to the industry's woes.

“Investments in crypto asset securities can be exceptionally risky … over the last year, the crypto asset space has been exceptionally volatile and a number of major platforms and crypto assets have become insolvent and/or lost value,” the SEC said.

“Investors in crypto asset securities should understand they may be deprived of key information and other important protections in connection with their investment.”

More than 46,000 people reported losing over $1 billion in cryptocurrency frauds since the start of 2021, the US Federal Trade Commission said in a report in June last year.

Nearly half of the people who reported losing digital currencies in a fraud scheme said it started with an advertisement, a post or a message on a social media platform, the commission said.

“Some promoters use social media to find and entice new investors with testimonials about returns made on deposits and investments, but what is not mentioned is that the promoter is often paying investor withdrawals out of new investor funds — a Ponzi scheme,” the SEC said.

Former FTX chief executive Sam Bankman-Fried, who faces fraud charges over the collapse of the cryptocurrency exchange. Reuters

“Moreover, recovering money from the wrongdoers can be nearly impossible. In part, that can be because of the anonymity or pseudonymity associated with crypto assets.”

In March last year, more than $600 million was stolen from Ronin Network, a side chain built for the play-to-earn game Axie Infinity. More than $30 million has been recovered, it was reported in September.

In December, more than $8 million worth of cryptocurrency was stolen from the wallets of BitKeep users in an apparent cyber attack.

Fraudsters continue to exploit the rising popularity of crypto assets to lure retail investors into scams, leading to devastating losses, SEC said.

“Crypto asset securities-related investments continue to be replete with fraud, including bogus coin offerings, Ponzi and pyramid schemes, and outright theft where the project promoter simply disappears with investors’ money.”

SEC advised users that having an investing plan, as well as understanding their risk tolerance and time horizon, can be critical to investing success.

Some of the suggestions include creating and following an investment plan, paying off credit cards or other high interest debt first, considering the importance of asset allocation and diversification, and understanding the market risk.

“All investments have risk," the SEC said. "While some regulated institutions may offer retail investors ways to gain exposure to crypto asset securities, even when using a regulated entity, investors should ask questions and make sure they understand the terms of the investment.

"Never invest if you do not understand the product, including the risks involved."