The Monetary Authority of Singapore (MAS) and Commercial Affairs Department (CAD) have issued advice to consumers on the potential risks of digital token and virtual currency-related investment schemes.
Members of the public need to "exercise due diligence to understand the risks" involved in investing in initial coin (or token) offerings (ICOs), and other schemes involving digital tokens, the advice said.
Virtual currency, such as bitcoin and ether, is one type of digital token, but these tokens are also being marketed as investment opportunities. The tokens can represent ownership of assets of property, or over a debt owed by the seller, the advice said.
These investment tokens are typically sold to consumers in exchange for virtual currency or cash, with details of the business proposal set out in a 'white paper' published online.
"ICOs and other investment schemes involving digital tokens may be structured in many ways with different business propositions. For example, they may seek to develop a new digital platform. Others may offer an opportunity to invest in a property, business, and assets, or with a promise of certain benefits or monetary returns," the statement said.
Anyone choosing to invest in such a scheme should make sure they understand the product and any underlying project, business or assets, it said.
Schemes that operate online or outside Singapore expose the consumer to a heightened level of fraud as it is difficult to check their authenticity, MAS and CAD said. If the scheme collapses it will be hard to trace the operators, and recovery on money invested may be subject to foreign law and regulation, it said.
Sellers may not have a proven track record, making it hard for investors to check their credibility, and "as with all start ups, the failure rate tends to be high," they said.
Even where digital tokens are tradable in a secondary market, in practice there may not be enough active buyers and sellers or the bid-ask spreads may be too wide, the statement said.
"Consumers may not be able to exit their token investments easily. In the worst case scenario where no secondary market develops, a consumer may not be able to liquidate his token holdings at all. The exchanges or platforms that facilitate secondary trading of digital tokens may not be regulated by MAS," it said.
Valuation of digital tokens is also highly speculative and, where tokens do not include any ownership rights to the seller's assets, they are merely speculative investments. Traded prices can fluctuate greatly in a short period, and there is a high risk than a consumer can lose their entire investment, the advice said.
Consumers should be particularly wary of schemes that promise high returns. "High returns could come in the form of high referral commissions, promising consumers benefits for referring additional participants. In fact, such commissions would increase operating costs, which could lower the chances of achieving the returns," it said.
These types of investment schemes are also more prone to being misused for illegal activities, the authorities said.
Investment products offered to consumers in Singapore must be registered with MAS, and consumers can check a Financial Institutions Directory on the MAS website to be sure than a scheme is legal MAS also published an Investor Alert List of entities that "may have been wrongly perceived to be regulated by MAS".
Technology law expert Bryan Tan of Pinsent Masons MPillay, the Singapore joint venture partner of Pinsent Masons, the law firm behind Out-Law.com, said: "The rapid development of ICOs as a fund raising tool has raised a number of concerns with the regulators and MAS has responded to public feedback with policy as well as public announcements."
Last week MAS announced a tightening of regulations around the way digital tokens can be offered or issued.
MAS acted after it identified a recent rise in the number of initial coin, or token, offerings (ICOs) in Singapore as a means of raising funds, it said.
MAS has now clarified that offering digital tokens as security during a trade in assets, or issuing them as shares, will be a regulated activity in Singapore, subject to some exemptions applying.
MAS said that will be the case where the offer or issue of digital tokens constitute products regulated under the Securities and Futures Act (SFA).
The US Securities & Exchange Commission has said that it will consider ICOs to be sales of securities from now on.
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