A statement issued Monday by Securities and Exchange Commission Chairman Jay Clayton offers investors a road map outlining the possible pitfalls as well as the opportunities presented by the rapidly expanding cryptocurrency landscape.
The cryptocurrency and “initial coin offerings” markets have experienced a dizzying amount of growth in the last few weeks. Bitcoin has crossed the $17,000 barrier, from a valuation of less than $1,000 at the start of 2017. So far this week, competing cryptocurrencies Etherium and Litecoin have been trending sharply upward as well.
But the SEC says investors should be wary as they begin investing in these products. “A number of concerns have been raised regarding the cryptocurrency and ICO markets,” Clayton writes in the statement, “including that, as they are currently operating, there is substantially less investor protection than in our traditional securities markets, with correspondingly greater opportunities for fraud and manipulation.”
Clayton warns that just because a trader refers to a product as “currency,” that is no guarantee it is not actually a security, and therefore subject to registration and other requirements under securities law. He recommends that investors ask if a particular offering is structured to comply with securities laws, and if not, how that could affect the value of the investment.
He also says that potential investors in cryptocurrency should ask other questions, including:
• What rights come with the investment?
• If a digital wallet is involved, can assets still be accessed if the key is lost?
• What are the possible legal protections in the event of fraud, a hack, malware or a downturn in business prospects?
But mostly, the SEC wants to make sure that investors are aware that in the brave new world of cryptocurrency, standard economic rules still apply.
“When advising clients, designing products and engaging in transactions, market participants and their advisers should thoughtfully consider our laws, regulations and guidance,” the statement says.