All that glitters is not gold when it comes to cryptocurrencies, say experts

Mafia bosses are modernising and turning to cryptocurrency Bitcoin to store their funds AFP/Justin TALLIS

On Monday (Dec 11), the cryptocurrency craze entered the mainstream with the Chicago-based CBOE Global Markets exchange offering bitcoin futures for trading for the first time, opening at US$15,460 and hitting a high of US$18,700. The excitement was further fuelled after a Reuters analysis on Wednesday suggested that bitcoin could surge above the psychologically important level of US$20,000.

The potential payout for investors of cryptocurrencies like bitcoin and initial coin offers (ICOs) is certainly tantalising.

The latter typically involves selling a new digital currency at a discount - or a “token” - as a means for a company to raise money. If that cryptocurrency succeeds and appreciates in value - just as stocks do - the investor has made a profit.

And there has been a surge in ICOs globally, with law firm Baker McKenzie Wong & Leow stating in a research note that there were 34 ICO projects raising US$665 million in July this year alone.

Despite the potential windfall, investors Channel NewsAsia spoke to have a mixed view about putting their money into cryptocurrencies and ICOs.

James, for one, said he has not and does not intend to invest in them as he has a “lack of understanding” in the medium and is “yet to be convinced that this is not speculative”.

Another investor, Bob, shared that he has a “low risk appetite” when it comes to investing, and has some concerns over cryptocurrencies’ “extreme volatility” and also the security issues surrounding them.

He cited a CNBC report in November which found a vulnerability in a cryptocurrency wallet provider called Parity, which allowed users to become the owners of wallets that did not belong to them by changing a code.

Last week, cryptocurrency marketplace NiceHash said the contents of its bitcoin wallet worth nearly US$64 million were stolen in a “highly professional attack with sophisticated social engineering”.

But one investor is undeterred, saying there is “substantial upside potential” in these early days of cyrptocurrencies. Johnson who has invested in ICOs shared that he is interested in those that “disrupt the status quo” and “bring about real change to the community".

He cited the example of Cashaa, a financial technology (fintech) which he said “promotes financial inclusion for the banked and unbanked, making remittances, for example, cheaper.”

The company closed its token sale and is in the process of getting listed.

INVESTOR, BEWARE

Experts, though, urged caution.

Mr Tim Phillipps, Asia Pacific leader for Deloitte's Financial Crime Network as well as Forensic and Analytics leader for Deloitte Southeast Asia, told Channel NewsAsia that "mum and dad investors" need to be wary of all ICOs.

"The lack of stable, regulated exchanges and acceptable levels of investor protections normally available in regulated securities market expose potential investors to a high level of risk of fraud, misrepresentation and ultimately capital loss," he said.

He added that "investors seem willing to send their money off to an anonymous promoter with a fancy website, committing their hard-earned funds to the equivalent of a digital currency black hole".

There are "stories of investors using personal credit, even taking out mortgages just to join the speculative frenzy – an all-too-familiar scene of a potential bubble, not terribly dissimilar to the dot-com boom", the Deloitte executive said. "This exponential demand with billions flowing into cryptocurrency trading is now too large to ignore."

On Wednesday, the Singapore Cryptocurrency and Blockchain Industry Association (ACCESS) issued a consumer advisory reminding investors that "volatility is a two way street" and market pricing for cryptocurrencies could fall as quickly as they rise.

Mr Nizam Ismail, head of regulatory sub-committee at ACCESS, wrote that for ICOs that offer some form of securities - meaning the rights are similar to that of shares, bonds or collective investment schemes - the token issuer must have a prospectus lodged with local regulator the Monetary Authority of Singapore (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," he warned.

MAS and the Commercial Affairs Department (CAD) had in August this year jointly issued a consumer advisory against the risks of digital tokens and virtual currency-related investment schemes.

In their advisory, they urged investors to make sure they fully understand the benefits and risks of the product or service first. They should also assess whether the features of the product or service offered meets their needs.

And before committing to an investment, consumers should:

- ASK the seller as many questions as they need to fully understand the investment opportunity

- CHECK if the information provided by the seller on itself or its scheme is true

- CONFIRM before investing the seller or its representative’s credentials by using resources such as the MAS’ Financial Institutions directory, register of representatives and Investor Alert list.

Deloitte's Phillipps said: "When it comes to ICOs, if it looks too good to be true, it probably is.

"Don’t invest until there are some appropriate investor protections in place – such as offerings through licensed securities dealers. Until then, you have as much chance getting your money back as picking the winning numbers in this week’s lottery."