INVESTOR ALERT – Cryptocurrencies and Digital Assets

The Secretary of State’s Division of Securities and Charities is issuing this Investor Alert to warn investors about investment frauds concerning cryptocurrency related investment and business opportunities.

Cryptocurrency opportunities will potentially reference both “coins” and “tokens” and while both terms are similar, there are differences in how coins and tokens operate.

Bitcoin is the most popular example of a coin or digital currency. Coins are based on a blockchain, a publicly accessible ledger that records all transactions. As digital currency, the coins function as digital money that can be bought, sold, transferred, or earned.

Tokens are not a currency but are more similar to shares of a company that have a value and may be traded on an exchange. However, unlike shares of a company, not all tokens constitute as equity in a company.

Many tokens and coins are offered similar to traditional “initial public offerings” (IPO). An “initial coin offering” (ICO) or “initial token offering” (ITO) are when an issuer sells coins and tokens in order to fund a proposed project or raise capital for the issuer. These coins and tokens are not the same as common stock or other securities offered through the highly regulated environment of IPOs.

Fraudsters often use the novelty of cryptocurrencies to lure investors into scams. We have become aware of a number of internet promotions, including on social media, claiming to raise capital for products and services or that cryptocurrency is a safe asset in times of financial market turmoil.

We urge investors to be wary of these promotions, and to be aware of the substantial potential for fraud at this time.

Promoters of fraudulent cryptocurrency investments lure unwary investors into their schemes.  In considering such offerings, we ask such investments be approached with caution keeping in mind the following:

  • Pump-and-Dumps: Groups of individuals coordinate to buy a thinly-traded cryptocurrency, promote the cryptocurrency on social media to push up demand and the price, and then sell it in a coordinated sale. The price plummets and those unaware of the scheme are left with the devalued cryptocurrency.
  • Multi-level Marketing Platforms: Companies lure investors through the promise of high returns with low risk. Investors are then incentivized to recruit more members. The business of these companies is tied to the intake of new investors and not to the value of the cryptocurrency. Eventually the company stops paying to recruit new members, leaving investors with worthless tokens or coins.
  •  “Guaranteed” High Investment Returns: Promoters emphasize guaranteed, secure profits while concealing basic facts, such as the names of the principals and even the physical address of their offices. There is no such thing as guaranteed high investment returns. Be wary of anyone who promises that you will receive a high rate of return on your investment, with little or no risk. 
  • Unsolicited Offers: An unsolicited sales pitch may be part of a fraudulent investment scheme. Exercise extreme caution if you receive an unsolicited communication – meaning you did not ask for it and do not know the sender – about an investment opportunity.
  • High Pressure to Buy: Fraudsters may try to create a false sense of urgency to get in on the investment. Take your time researching an investment opportunity before handing over your money.
  • Volatility: Cryptocurrency markets are highly volatile, making them unsuitable for most investors looking to meet long-term savings or retirement goals. Cryptocurrencies are commonly touted as safe alternatives in times financial or global chaos.
  • Uninsured: Cryptocurrency accounts are not insured by U.S. or Canadian depository insurance.
  • Unregulated: Cryptocurrency investors may rely upon unregulated exchanges or offerings that potentially lack appropriate internal controls, making them susceptible to fraud, theft, and hacking.
  • Hackable: Creating a digital wallet to store cryptocurrency involves installing software on an investor’s computer. As with any software download, hackers may include malicious code to compromise the computer.
  • Vulnerable: Purchasers of crypto-currencies rely on the strength of their own computer systems as well as systems provided by third parties to protect purchased cryptocurrencies from theft.

As with any type of financial product, fraudsters are willing and ready to exploit the hype around cryptocurrencies and related products for their own purposes. Cryptocurrencies and related products are not functional equivalents of traditional banking, securities, or insurance investment products. Like any investment product, investors in cryptocurrencies should be prepared to lose the entire amount of their investment. 



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