With cryptocurrencies attracting recent headlines, the Investor Protection Unit of the Delaware Department of Justice is warning Delaware investors to be cautious about investments involving cryptocurrencies.
“Investors should make certain they understand the risks associated with investments in cryptocurrencies and financial products involving cryptocurrency before they invest,” said Director of Investor Protection Greg Strong.
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, cannot always be exchanged for other commodities, 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 the Investor Protection Unit is a member, shows 94 percent believe there is a “high risk of fraud” involving cryptocurrencies.
Regulators also were unanimous in their view that more regulation is needed for cryptocurrency to provide greater investor protection.
“The rapid price swings in cryptocurrency-related investments may tempt investors to invest in cryptocurrency without first becoming knowledgeable about the risks involved,” Strong said. “Cryptocurrencies and investments tied to them are extremely volatile and highly speculative investments. Combined with a high risk of fraud, cryptocurrencies are high-risk investments.”
Last month, NASAA identified Initial Coin Offerings (ICOs) and cryptocurrency-related investment products as emerging investor threats for 2018.
Unlike an Initial Public Offering (IPO) when a company sells stocks in order to raise capital, an ICO sells “tokens” in order to fund a project, usually related to the blockchain. The token likely has no value at the time of purchase.
Some tokens constitute, or may be exchangeable for, a new cryptocurrency to be launched by the project, while others entitle investors to a discount, or early rights to a product or service proposed to be offered by the project.
NASAA offers a short animated video to help investors understand the risks associated with ICOs and cryptocurrencies. NASAA and its members first alerted investors of the risks associated with cryptocurrencies in 2014.
The Investor Protection Unit can be reached at 302-577-8424 or through our website at https://attorneygeneral.delaware.gov/fraud/ipu/.