The Financial Sector Conduct Authority (FSCA) has urged South Africans to exercise more caution while investing in cryptocurrencies.
This follows a large number of complaints FSCA is receiving from investors who lost their savings “through investing in a crypto-related investment that they did not understand, or a scam packaged as a crypto investment promising unrealistic high returns,” it said in a statement on Thursday.
Cryptocurrencies, such as Bitcoin and Ethereum, are digital representations of value that are not issued by a reserve/central bank. They are often characterised by dramatic and unpredictable fluctuations in value.
FSCA said there is no regulatory body for cryptocurrencies in South Africa, something that exposes investors to unrecoverable losses should anything go wrong.
Cryptocurrency risks
The Authority outlined some risks associated with crypto investments as follows:
- Crypto investment firms may be overstating potential pay-outs or understating the risks.
- The high-risk nature of crypto assets investments – or lending linked to them – means you could lose all of your money.
- There is no guarantee that crypto assets could be converted back into cash, putting consumers at the mercy of supply and demand in the market.
- The price of crypto assets has no underlying basis for value determination. Instead, prices can fluctuate wildly based on global sentiments driven by persons who have an interest in the value of the crypto asset being driven up.
- Many concepts used by multi-level marketers and Ponzi scheme operators are being applied to make potential investor afraid of “missing out.” This perpetrates the cycle of new investors acquiring the crypto asset thus driving the price up.
- In the end, there is no guarantee that when you wish to sell, the sentiment will still exist and that buyers will even exist or be available to acquire the crypto asset from you.
- There is often high price volatility placing even greater financial risk to consumers.
FSCA’s caution to investors
FSCA therefore advised prospective investors to make sure their crypto asset investments make up only a small part of their overall investment portfolio.
In view of the high risk involved, investors should also seek professional advice on the overall suitability of a cryptocurrency investment and the impact on their investment portfolio should it fail.
Investors should consider “more appropriate and balanced investment products [that] are available and offered by licensed Financial Service Providers regulated by the FSCA” before venturing to crypto assets.
Furthermore, they should not be pressured or lured into “going with the flow.” In fact, potential investors should not be afraid of being left out of the “next big thing.”
“There are no safe ‘quick rich’ schemes in the world. When it comes to your retirement, take a prudent and responsible approach and never put a large percentage of your wealth into any investment product. Diversification of risk is the most important principle for longterm wealth creation and preservation,” FSCA said.
It further cautioned investors to beware of marketing material that highlights the potential rewards of crypto assets investments without explaining the potential downsides or risks.
“It is for this reason that the FSCA is working at finding measures to regulate certain aspects and players in the crypto asset space,” the Authority explained.
“These measures will be rolled out during the coming months and we are working with other members of the Intergovernmental Fintech Working Group (IFWG) to better understand and regulate where appropriate crypto assets in South Africa.”