The Monetary Authority of Singapore (MAS) and the Commercial Affairs Department (CAD) have come out with a joint statement warning the general public of the risks of the initial coin (token) offerings (ICOs) and investments in digital currencies in general.
“Members of the public are advised to exercise due diligence to understand the risks associated with ICOs and investment schemes involving digital tokens”, the statement reads.
The publication explains that a digital token is not necessarily a digital currency, but a digital currency is a type of digital token. Generally, a “digital token is a cryptographically-secured representation of a token-holder’s rights to receive a benefit or perform specified functions”. It can be used to represent ownership or security interest over assets, property or debt and is marketed as an investment opportunity.
Usually digital tokens are offered through and ICO, but there are other investment schemes as well. The digital token is most often specific to the seller and is typically sold to the consumers for popular digital currencies such as Bitcoin or Ether. The sellers often set out their business proposal in a so-called “whitepaper” which is published online. Those proposals usually involve the development of digital platforms, but it is sometimes offered as an opportunity to invest in property, a business or assets.
Most important, MAS notes, is that the potential investors understand well the product and what is being offered to them. It is advisable that clients make the effort to find out more about the proposal. There, however, is a risk of fraud, especially when the scheme is operating online or outside of Singapore, as it is hard to verify its authenticity. If the proposal falls through, it would be hard to trace the operators and to recover the lost money.
Additionally, the issuer of the digital token may not have a proven track record and as with all start-ups, the failure rate tends to be high.
There is also the risk that investors would not be able to “cash in” their tokens, even if they are tradable on the secondary market. There may not be enough buyers and sellers and the bid-ask spreads may be too wide. Also, the exchanges or platforms that facilitate secondary trading of digital tokens may not be regulated by MAS. In the worst case there would be no secondary market and the holder would end up with absolutely useless digital tokens.
MAS also warns that consumers should be wary of schemes that promise high returns. As with all other investment schemes that promise unrealistically high profits, they may be a scam. There may also be high commissions. Such digital tokens may also be a multi-level-marketing (MLM) scam, like for example the notorious OneCoin token.
Last but not least, the tokens may be used for nefarious purposes.
In the end of its long expose, MAS advises that investors check whether the schemes are regulated by it or if they are on the Investor Alert List. Any suspicious schemes should be reported to the police.