The North American Securities Administrators Association ("NASAA") warned investors about the risks associated with Initial Coin Offerings ("ICOs") and other cryptocurrency-related investments. According to a NASAA survey, state regulators are nearly unanimous in their concern that cryptocurrencies present a high risk of fraud and require greater regulation for investor protection. NASAA explained that cryptocurrencies are not insured by a governmental authority, cannot always be exchanged for commodities, and are generally unregulated. NASAA President Joseph Borg cautioned investors that "cryptocurrencies and investments tied to them are high-risk products with an unproven track record and high price volatility," and said that investments in such products are "not for the faint of heart."
NASAA identified several common concerns regarding cryptocurrency, including:
- Cryptocurrencies are often subject to little or no regulatory oversight and are vulnerable to cybersecurity attacks;
- Cryptocurrency accounts are not FDIC-insured;
- Cryptocurrency investments are highly volatile and thus unsuitable for many investors;
- Cryptocurrency investments are often reliant on unregulated companies that are particularly susceptible to fraud and theft; and
- Investors must rely on their own cybersecurity measures to protect purchased cryptocurrencies.
NASAA also urged investors to be aware of the following common red flags of investment fraud: (i) "guaranteed" high investment returns, (ii) unsolicited offers, (iii) pressure to make immediate purchases, and (iv) unlicensed sellers.
In a supportive statement, SEC Chair Jay Clayton and Commissioners Kara Stein and Michael Piwowar applauded NASAA for calling attention to "important issues" surrounding cryptocurrency-related investments. They said that cryptocurrencies were originally marketed as replacements for traditional currencies, but "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." Chair Clayton and the Commissioners further encouraged investors to be aware that many ICO promoters are acting in violation of state and federal securities laws, noting that victims of ICO schemes are not necessarily guaranteed to recover their lost investments.
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