MAS and CAD sound warning over digital tokens and related investment schemes

Singapore

THE authorities have warned the public about the risks tied to investment schemes involving digital tokens, even as the fast-growing industry attracts believers - and enlarges the pool of those who could end up losing their money.

A Singapore Police spokeswoman told The Business Times that since 2015, more than 100 reports related to digital-token investment schemes have been lodged with the Commercial Affairs Department (CAD).

Of course, not all these were fraudulent cases, BT understands, as some people, upset that they had lost money, filed reports.

The CAD and the Monetary Authority of Singapore (MAS) said in a joint statement on Thursday: "The CAD and the MAS advise consumers to be mindful of potential risks of digital token and virtual currency-related investment schemes."

The two agencies were referring to the spate of initial coin offerings (ICOs) and other investment schemes involving digital tokens in Singapore.

A digital token is a cryptographically-secured representation of a token-holder's rights to receive a benefit or to perform specified functions; one type of digital token takes the form of virtual currency like Bitcoin and Ether.

Digital tokens have, however, evolved beyond being virtual currencies; they have since come to be used to represent ownership or a security interest over the token seller's assets or property, or a debt owed by the seller, said the joint statement.

Digital tokens offered through an ICO are usually specific to the seller, and such tokens are typically sold to consumers in exchange for a widely-used virtual currency (such as Bitcoin or Ether) or cash.

Sellers typically set out their business proposal in a "White Paper" published online, and market the digital tokens as investment opportunities, noted the statement.

On Aug 6, Real Estate Asset Ledger or REAL, a real-estate crowdfunding company based in Singapore, launched a sale of its tokens, through which investors can put money in its real estate using cryptocurrency. The announcement was on the Bitcoin.com website.

REAL has its eye on disrupting the world of real estate by applying blockchain technology to an industry that is historically inefficient and illiquid, it said.

Last month, two Singapore "proptech" companies, FundPlaces and Reidao, said they are using blockchain platforms to "tokenise" property - that is, to create tokens backed by real estate which investors can buy.

A blockchain is basically a way to maintain a database without a central authority. It makes it feasible to have a fully distributed database in which users always have access to the most updated version.

It is a pioneering move that is nascent even globally - and is such a new idea that there does not seem to be explicit existing legislation in Singapore governing these digital instruments.

The CAD and MAS therefore urge consumers to ensure that they fully understand the benefits and risks of the product or service before committing their funds to it. Consumers should also assess whether the features of the product or service offered meets their needs.

The CAD and MAS point out that the valuation of the digital tokens are usually not transparent and highly speculative.

When digital tokens do not hold any ownership rights to the seller's assets, it means the tokens are not backed by tangible assets. Such tokens would be merely speculative investments; their traded price can fluctuate greatly within a short period. There is a high risk that a consumer could lose his entire invested amount.

The two agencies said that, before committing to an investment, consumers should confirm the seller or its representative's credentials via MAS's Financial Institutions Directory, or its Register of Representatives and Investor Alert List.

MAS-regulated entities are subject to conduct rules. If consumers deal with entities that are not regulated by MAS, they forgo the protection afforded under laws administered by MAS, said the statement.

Market observers say the authorities are correct to draw attention to the risks involved in these new investments which - barring instances of fraud - work only when investors believe in them.

Song Seng Wun, an economist at CIMB Private Banking in Singapore, said: "It's small but growing in the overall scheme of things . . . regulators are rightly nervous. We are in a digital age and digital tokens seem a logical extension, and while regulators like to see new things, the risks are high. The concept behind virtual currency is acceptance - or as long as everyone believes."

TSMP Law joint managing director Stefanie Yuen-Thio said that the consumer advisory issued on Thursday was aimed at raising awareness among retail investors, to give them a more fleshed-out description of the risks and issues. "There has been a lot of talk about virtual currencies in the press, with reports of how the value of Bitcoin has grown exponentially over certain periods. This may lead investors to put their money in securities with a 'blockchain' or 'digital token' label, for fear of missing out.

"Just because 'ICO' sounds like 'IPO', and these offerings have a White Paper - which investors may think is akin to a prospectus - does not mean that investors have the same degree of protection. There's no certainty that the White Paper contains relevant and sufficient disclosure, or that the information has been properly verified."

Anson Zeall, chair of ACCESS, the Singapore Cryptocurrency and Blockchain Industry Association, said: "ICOs are an exciting new opportunity, but we advise consumers to conduct rigorous due diligence before making any investment."

CIMB's Mr Song added: "These are 'extremely alternative' investments within alternative investments."