After a bleak 2022 and 2023 marred by controversy and fraud, crypto is back in the spotlight. Driven by news, including headlines about the launch of US-based spot ETFs and evolving regulatory developments, this digital asset has seen a surge in value, attracting investors looking for alternative investments.
However, crypto’s potential for higher returns comes with a significant risk of greater loss. Unlike conventional investments, the very features that make crypto appealing also make it inherently risky. This risk extends beyond price volatility, including vulnerability to scams.
Understanding the basics of crypto, the associated risks and what makes it an easy target for scammers is crucial for anyone considering entering this fast-changing market.
Cryptocurrencies are part of a wider movement to create a financial system that is open, borderless, decentralized and immutable. Proponents of crypto believe that the system would foster a culture of financial transparency and collaboration that allows for rapid innovation and development.
While commonly called ‘cryptocurrencies,’ the term can be misleading. In Canada, cryptocurrency is not recognized as legal tender under the Currency Act. The term ‘crypto asset’ more accurately encompasses the common types of digital assets you might encounter, including utility tokens, payment tokens, virtual assets, digital currencies, or stablecoins.
Trading crypto is allowed in Canada, but not all crypto assets are considered securities. This does not mean that investor protections offered by securities laws do not apply to them.
To safeguard Canadian investors, the Canadian Securities Administrators (CSA) asserted jurisdiction over Crypto-Trading Platforms (CTPs), commonly known as crypto exchanges, operating in Canada. As a result, all CTPs in Canada must be registered with the Alberta Securities Commission or another provincial securities regulator.
Over the years, crypto’s rise to prominence can be attributed to several factors. First, its decentralized nature allows for peer-to-peer transactions without the oversight of a trusted third party like a traditional financial institution. Cutting out central authorities overseeing transactions reduces fees and speeds up processing times. Secondly, due to its highly speculative nature, investors may be drawn to the potential for higher profits, using it as a way to diversify their portfolio or make quick short-term gains.
But this allure also brings inherent risks.
Decentralization and lack of regulatory oversight: The principle of decentralization is foundational to crypto. However, the lack of oversight can also weaken investor protections.
Investors often use crypto exchanges to buy or trade crypto. In Canada, any platform trading crypto assets must be registered with the ASC or another provincial Canadian securities regulator. Unregistered platforms might not comply with securities law, including providing false information and lacking investor protections like secure client fund handling, safekeeping of client assets and measures against market manipulation.
Also, given crypto's borderless nature and anonymity advantage, in case of fraud, crypto sent to unregistered platforms located in foreign jurisdictions may never be recovered.
Price volatility: Crypto is known for its frequent and significant price fluctuations. These extreme swings often attract investors hoping for quick, short-term gains. However, the highly speculative nature of the asset class, heavily influenced by market sentiment, also creates opportunities for scammers to deploy their schemes.
While scammers often repurpose traditional investment scams like pump and dump or Ponzi schemes by including a crypto element, common crypto scams include:
Before committing to putting your hard-earned money into an investment, either traditional stocks and bonds or crypto trading, always Check First.
Check: if the investment suits your risk tolerance; if the crypto asset trading platform you choose to use is registered with the Alberta Securities Commission; and if you understand the business.
As every crypto enthusiast knows, thorough research, referred to as “doing your own research,” DYOR is critical. It can help you understand the risks and opportunities, invest suitably, and avoid scams.
Source: Alberta Securities Commission
Rug Pulls: Rug pulls, which get their name from the expression “pulling the rug out,” involve attracting investors with a new crypto project and pulling out all funds before the project is built, leaving the investors with no balance in the pool. These scams can sometimes include elements of a Ponzi scheme, where investors profit by recruiting other users with false financial promises.
Fake Initial Coin Offerings (ICOs): Fraudsters frequently create fake ICOs, where a new crypto product is launched and sold to investors. These fake ICOs may have professional-looking websites and whitepapers but ultimately offer nothing of value, leaving investors with nothing but empty promises.