When the North American Securities Administrators Association released warnings on Bitcoin and other cryptocurrencies, SEC Chairman Jay Clayton commended it, stating, “NASAA’s release is a timely and thoughtful reminder to Main Street investors to exercise caution.”
Cryptocurrencies, touted as replacements for traditional currencies, “lack many important characteristics of traditional currencies, including sovereign backing and responsibility, and now are being promoted more as investment opportunities than efficient mediums for exchange,” Clayton explained.
However, all regulators have been active in regulating this new market, with the SEC leading the way with regulating tokens as securities. In fact, one former CFTC regulator, Jeff Bandman, commended the SEC, saying that its 21A Report of Investigation (issued in July 2017) was a clear analysis of issues tied to DAO (digital) tokens.
“It made clear that the Howey test applied, looking at substance rather than form,” Bandman told HuffPost last year, referring to the Supreme Court test for determining whether certain transactions qualify as investment contracts. “I view that report as a ‘Digital Marbury vs. Madison.’” He says that report made clear the SEC’s jurisdiction in the digital space and “put the market on notice that these tokens can be securities.”
That said, when it comes to investing in these products, Massachusetts’ top securities regulator has warned investors in his state and beyond not to get caught up in Bitcoin speculation.
“Bitcoin is just the latest in a history of speculative bubbles that most often burst, leaving the average investors with a worthless product,” said Commonwealth Secretary William F. Galvin in a statement. “Going back to the 1600s with tulip mania to the present Bitcoin craze, chasing the next best thing will, more often than not, end in disaster for the average investor.”
Before buying Bitcoin or assets associated with it, Galvin and the NASAA suggest investors carefully consider the following facts and suggestions:
- Bitcoin and other virtual currencies are not regular money and are not backed by the United States or any other government or central bank.
- Carefully investigate the seller before making a purchase of Bitcoin to know what recourse you would have if something went wrong.
- Compare the fees and costs associated with Bitcoin purchases and get details on the terms for redeeming Bitcoin into regular money.
- Virtual wallets that store Bitcoin do not provide the same safeguards as deposits made at traditional banks; thus, unrecoverable losses may occur if Bitcoin is stolen from these virtual wallets.
- Bitcoin values fluctuate enormously and may do so in short periods of time; investors should prepare for radical value changes in Bitcoin investments, including single-day drops or increases in the thousands of dollars.
- Bitcoin investing is considered to be highly speculative, since the value is not related to any economic or financial parameters; it is advisable not to speculate with money that investors cannot afford to lose.
- Bitcoin and other virtual currencies are based on public ledgers called blockchains, which are still experimental and subject to changes, errors and/or criminal activity that may adversely affect virtual wallets or erase Bitcoin value.
- The unregulated and ambiguous nature of Bitcoin is fertile ground for investment scams and other financial fraud, which may cause investors to lose money.