HELENA, Mont. – With cryptocurrencies like Bitcoin continuing to attract headlines, Securities Commissioner Matt Rosendale today reminded Montana investors to be cautious about investments involving cryptocurrencies.
“Investors should go beyond the headlines and hype to understand the risks associated with investments in cryptocurrencies, as well as cryptocurrency futures contracts and other financial products where these virtual currencies are linked in some way to the underlying investment,” Rosendale said. “If you are thinking about buying a cryptocurrency, you should first research and understand its underlying technology, and accept that there is a high degree of risk due to drastic price fluctuations in this evolving marketplace.”
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 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 Montana is a member, shows 94 percent believe there is a “high risk of fraud” involving cryptocurrencies.
“The recent wild price fluctuations in cryptocurrency-related investments can easily tempt unsuspecting investors to rush into an investment they may not fully understand,” Rosendale said. “While the blockchain is an exciting new technology, we have seen fraudulent actors trying to entice Montanans into giving money to illegitimate cryptocurrency investments. Anyone acting as an investment advisor or treating cryptocurrencies as a security product must be licensed with our office.”
Investments in cryptocurrencies may or may not be securities subject to regulation by the Commissioner of Securities and Insurance, Office of the Montana State Auditor (CSI), depending on how those purchases are conducted. In general terms, an individual who directly purchases a cryptocurrency and controls the private key to accessing that currency, or uses cryptocurrencies as a medium of exchange, are not subject to regulation by CSI. Purchasing cryptocurrencies through a third party as an investment falls under Montana securities laws and regulations. Cryptocurrency mining is not regulated by the CSI.
NASAA has identified Initial Coin Offerings (ICOs) and cryptocurrency-related investment products as emerging investor concerns for 2018. NASAA and its members first alerted investors of the risks associated with cryptocurrencies in 2014.
Common Cryptocurrency Concerns
Some common concerns investors should consider before investing in any offering containing cryptocurrency include:
- The high volatility of cryptocurrency investments makes them unsuitable for most investors, especially those investing for long-term goals or retirement.
- Cryptocurrencies held on an exchange platform or app, instead of a digital wallet or external drive, can be at risk of theft or loss.
- Investors in cryptocurrencies are highly reliant upon unregulated companies, many located outside the United States, including some that may lack appropriate internal controls and may be more susceptible to fraud and theft than more established 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.
- Cryptocurrency accounts are not insured by the Federal Deposit Insurance Corporation (FDIC), which insures bank deposits up to $250,000.
Common Red Flags of Fraud
The CSI 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 CSI can help investors research the background of those selling or advising the purchase of an investment. The CSI can be reached at (406) 444-2040 or through our website at www.csimt.gov.