Law Bites – July 2022

What Are The Risks To Crypto Investors?

 

The cryptocurrency market has taken a real beating in recent months with the world’s most traded digital currency, Bitcoin, tumbling 70% in value, now hovering around US$20,000. The total crypto market capitalisation has also plunged by nearly two-thirds.

A major trigger for that was the crash of algorithmic stablecoin TerraUSD and its sister token Luna, which wiped out billions of dollars in the space in May.

The plummeting prices have also had a huge ripple effect, creating substantial issues for some of the biggest names in the industry. Singapore-based crypto hedge fund, Three Arrows Capital, was ordered into liquidation last month after failing to repay creditors.

Crypto financial institution, Babel Finance, as well as exchanges Celsius Network and Blockfi and crypto lender Vauld are all facing issues, with the latter firm recently announcing a suspension on withdrawals, trading and deposits.

The volatility of the crypto market has forced global regulators to take a closer look at regulations for the sector and investor protection.

The Monetary Authority of Singapore (MAS) has said that it is mulling the introduction of additional consumer protection safeguards for crypto trading. So far, the MAS has already issued warnings of crypto dangers and advised the retail public to refrain from participating in the trading of crypto. In January 2022, MAS also restricted the marketing and advertising of crypto services in public areas, and forbade practices that trivialise the risks of crypto trading.

MAS senior minister and minister-in-charge, Tharman Shanmugaratnam, recently stated that additional protection measures can include limiting retail participation, and implementing rules on the use of leverage when transacting in cryptocurrencies.

The borderless nature of the crypto market, minister Shanmugaratnam also said, means there will be a need for “regulatory coordination and cooperation globally”.

This is even more pertinent in the current climate with fraud on the rise, especially within the financial and banking sector. Crypto investments are ripe hunting ground for fraudsters who are making the most of its growing popularity and unregulated status.

Crypto investment come with huge risks, which all investors should be aware of before looking to purchase cryptocurrencies. That said, the risk is still entirely on the investors, with no formal protection in place yet.

Here are some primary risks investors should be wary of:

Volatility and price manipulation – The value of cryptocurrencies has gone through booms and busts over the past decade, the causes and triggers of which can be baffling. Volatility in crypto prices generally originates from three primary sources – sentiment, speculation, and market manipulation. Manipulation tactics include wash trading, pumps and dumps, and shilling. With manipulation often being hard to prove, regulators may find it hard to protect the interests of retail investors.

Underdeveloped regulations – A lack of comprehensive and well-developed regulatory frameworks lead to much unpredictability. Concerns by relevant stakeholders on potential future restrictions may adversely impact the value of cryptocurrencies. So far, some countries including China have opted to err on the side of caution and banned crypto trading entirely. Some others, like Singapore, are taking steps to produce standards and introduce new regulations. Further ashore from Asia, Switzerland has been one of the first countries to begin building a robust regulatory framework.

Security and custody – Storing cryptocurrencies has its dangers. There have been incidents of theft and hacking on personal wallets. When that happens, investors may not be able to recover their assets. In the case where crypto service providers are not subject to regulation imposing . official custodial safeguards, investor restitution on lost investments depends very much on the organisations that the investors are dealing with.

Trading terms – Trading will invariably be on the standard terms and conditions of the exchange with little or no scope for customers to vary them.

In summary, crypto could be a good investment for people with a high-risk tolerance but with the myriad of risks at this stage, retail investors must tread carefully.

 

 

Kay Yong
Counsel
JTJB Singapore Office
E: kayyong@jtjb.com
T: 6329 2414 / 9620 9904

 

This update is for general information only and is not intended to constitute legal advice. JTJB has made all reasonable efforts to ensure the information provided is accurate at the time of publication.