NEWARK – With cryptocurrencies continuing to attract headlines, Attorney General Christopher S. Porrino and the Bureau of Securities, which is within the Division of Consumer Affairs, today reminded New Jersey investors to be cautious about investments involving cryptocurrencies.
“Cryptocurrencies may be the new rage when it comes to investments, but there are significant risks associated with transactions involving these predominantly unregulated currencies,” said Attorney General Porrino. “Investors should fully understand the types of currency and transactions being pitched to them before agreeing to invest.”
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 Bureau of Securities 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.
“Because of the high risk of fraud and some projections of huge returns, investors must be on alert and not be tempted to invest in cryptocurrency-related investments without first vigorously vetting any transaction,” said Sharon M. Joyce, Acting Director of the Division of Consumer Affairs. “Understanding what is being sold is the best armor an investor has against fraud.”
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.
“Transactions involving cryptocurrency are often complicated and confusing with an unproven track record. They are not designed for investors with a low tolerance for risk or volatility,” said Christopher W. Gerold, Chief of the Bureau of Securities. “The best advice we can give is for investors to be completely aware of the risks before investing and act accordingly.”
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.
Common Cryptocurrency Concerns
The following are some common concerns investors should consider before investing in any offering containing cryptocurrency:
Common Red Flags of Fraud
The Bureau of Securities also reminds investors to keep watch for these common red flags of investment fraud:
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