Caution urged for investing in cryptoassets

The Securities Commission (here also referred to as the Commission) issues this warning in order to alert the public and draw the attention of prospective investors to the risks associated with investing in cryptoassets, such as cryptocurrencies and digital tokens. Namely, a comprehensive system of regulation and oversight of issues and trading in cryptoassets has not been established yet, not just in the Republic of Serbia, but also globally. Therefore, investments in these instruments carry higher risk.

Some of the main risks associated with this type of investments are:

• fraud and other illicit activities,

• extreme price volatility and lack of exit options,

• lack of relevant information (on the instrument issuer, characteristics of the instrument) which is required to make informed investment decisions,

• protection of personal data.

For these reasons, the Commission advises (prospective) investors to be wary when investing in cryptoassets. If an investor considers investing in cryptoassets, it is recommended that exposure to risks associated with cryptoassets is carefully examined.

Here follows a brief explanation of each of the risks investors might face.

When trading in financial instruments is considered, frauds do happen, but their incidence is significantly higher with cryptoassets. Even seasoned, highly-educated investors are susceptible to fraud. No one is completely immune. Caution is warranted and it is advisable to pay attention to the red flags indicating fraud. One of the commonest red flags are promises of guaranteed returns. Rest assured, when it comes to investing there is no such thing as a guaranteed return. Risk is an integral part of any investment. It is recommended that you be wary of anyone claiming otherwise.

Moreover, if an investment opportunity seems too good to be true, it most probably is not. Investors are allured with promises of quick and high returns with low risk, tales of fantastic profits earned by investors and similar. If in addition to this, there is pressure to make a decision quickly or promises of bonuses offered for investing immediately, there is a great chance that they do not want you to thoroughly analyze the investment offered.

Often, cryptoassets are offered by off-shore companies or by companies where it is unclear where and whether they are registered at all, with no information on the management, capital etc. The Commission underscores that it is always advisable to know exactly with whom you are concluding a contract, and if the counterparty refuses to provide the relevant information, this might indicate possible fraud.

The technology behind cryptoassets can be very complex, and many aspects of a prospective investment depend on the type of the technology employed, for example, how to exit your cryptoholdings later, the rights stemming from the specific digital token etc. If all the important aspects of the technology in question are not clear, please consider that some characteristics of the investment might have been presented better than they really are.

In order to provide investment services in connection with the financial instruments in the Republic of Serbia, investment firms are required to meet many stipulations (referring to, inter alia, the minimum capital, professional capacity of employees) and to obtain a license from the Securities Commission for the provision of their activities. On the other hand, companies issuing or offering cryptoassets which are not financial instruments are not bound by any regulatory requirements. Therefore, it is probable that the company with a superb website presentation, actually has neither the financial capacity nor the expertise to implement the projects it promotes.

In accordance with its powers, the Commission supervises the regulated investment firms. Their operations when providing investment services are subject to regulation and oversight, and investors know who to address in case their rights are infringed. Should the investors decide to deal with companies not licensed by the Commission, registered abroad or where it is unclear who the owners and the management are, the protection of their rights might be aggravated or even impossible.

Issues, offers and trading in financial instruments are subject to many rules and any breach of such rules has consequences. As (i) issuing and trading in digital tokens in certain cases can be subject to such rules and (ii) the companies often disregard the rules, the Commission, in exercise of its powers, might impose a set of statutory measures including initiation of relevant procedures against the persons responsible in the company.

Different financial instruments carry different volatility. For example, investments in indices and state bonds are considered to entail lower risk than trading in futures. When cryptoassets are concerned volatility is extremely pronounced. This means that investors may end up with immense losses and the Commission advises to formulate your investment strategies bearing this in mind.

Due to high volatility (and the mentioned lack of regulation) fraudsters are capable of efficiently applying schemes in trading (pump and dump, scalping etc.) which might lead to the loss of the money the investors invested in good faith.

This is a risk found with any of the activities on the internet, but the Commission believes that it is worth mentioning. When buying cryptoassets, an investor leaves personal information to companies which are often not registered in the Republic of Serbia. Such companies are not accountable to the Republic of Serbia authorities when it comes to handling information on the Republic of Serbia citizens. The unwitting investor might easily become prey to unsolicited marketing, and it is possible that many other examples of information abuse might occur as well.

Safety of such data is often well below the appropriate levels and there were instances of third parties coming into their possession. It should be considered especially that here personal information is required in the context of financial transactions, which might lead to malicious breaches of private keys and the theft of cryptoassets.

As explained, the Commission warns (prospective) investors that it is necessary to act with due care when investing in cryptoassets and draws their attention to the listed risks.

Furthermore, if you find yourself to be a victim to a fraud or any other illicit activity in relation to the Commission powers, please notify the Commission thereof using the email office@sec.gov.rs so that relevant steps could be undertaken.