The Financial Sector Conduct Authority (FSCA) recently published a Press Release regarding the risks surrounding crypto-related investments. The FSCA is receiving a large number of complaints from investors who have lost their savings through investing in crypto-related investments, or where investors have fallen foul to scams packaged as a crypto investment promising unrealistic high returns. The Press Release alerts consumers of the inherent risks involved with investing in crypto-related investments and cautions potential investors.
What are Crypto assets?
Crypto assets, or cryptocurrencies, are digital representations of value that are not issued by a central bank. Some of the more well-known crypto assets include Bitcoin and Etherium. Crypto assets are traded, transferred and stored electronically. They have been used for payments, investments and capital-raising. Currently, crypto assets are not regulated in South Africa which means that investors will have no legal protection or recourse against anyone in the event of any loss of money.
The financial risks, highlighted by the FSCA to consumers, include:
- Crypto investment firms may be overstating potential pay-outs or understating the risks.
- Investing in crypto assets, or investments and lending linked to them, generally involves taking very high risks with investors’ money, which mean that you should be prepared to lose all of your money.
- There is no guarantee that crypto assets could be converted back into cash, putting consumers at the mercy of supply and demand in the market.
- The price of crypto assets is dictated by the underlying mood or sentiment of the general public with no underlying basis for value determination. The prices are driven by the worldwide sentiment which is driven by persons who have an interest in the value of the crypto asset being driven up. Many concepts used by multi-level marketers and Ponzi scheme operators are being applied to make potential investors afraid of being left out and perpetrating the cycle of new investors acquiring the crypto asset thus driving the price up. In the end there is no guarantee that when you wish to sell, the sentiment will still exist and that buyers will even exist or be available to acquire the crypto asset from you.
- There is often high price volatility placing even greater financial risk to consumers.
Cautionary advice from the FSCA:
- If crypto assets are purchased, it should only make up a small proportion of the investment portfolio. This should apply regardless of the level of risk that an investor is prepared to accept.
- Before investing, proper advice should be obtained by the consumer regarding the overall suitability of such high-risk product in an investment portfolio and the impact on it should it fail.
- When it comes to retirement, take a prudent and responsible approach and never put a large percentage of wealth into any investment product. Diversification of risk is the most important principle for long term wealth creation and preservation.
The Press Release states that the FSCA is working at finding measures to regulate certain aspects and players in the crypto asset space which will be rolled out during the coming months. The FSCA is working with other members of the Intergovernmental Fintech Working Group (IFWG) to better understand and regulate, where appropriate, crypto assets in South Africa. The Press Release further states that the FSCA currently discourages the exposure of Retirement fund assets to risks associated with crypto assets until regulation has been finalised to safeguard investors.
To read the related documents, click on the links below: