Risks of digital tokens

What are digital tokens?

A digital token is a type of digital asset that is typically maintained using blockchain technology. It can represent various things, such as something of value, a medium of exchange, or a right to access a service.

Tokens are a string of computer codes. They are usually issued in pairs as public and private keys.

There are three main types of digital tokens:

• Payment tokens

• Securities tokens

• Utility tokens

The most commonly known digital tokens are payment tokens, which are used, or intended to be used, as a means of payment. This type of token is commonly called “cryptocurrency" although it is not a “currency” issued by any government. Bitcoin, Ether and Litecoin are examples of payment tokens.

Risks involving payment tokens/cryptocurrencies

MAS has cautioned that trading in cryptocurrencies and their derivatives are not suitable for retail investors.

Here are some risks involving cryptocurrencies which you should be aware of:

• Speculative value: The value of cryptocurrencies is highly volatile and not transparent. Often, they do not have any underlying value attached, and trade on speculation, especially in the case of “meme coins”. The traded price can fluctuate greatly in a short time and can become zero overnight. It is possible to lose every cent you put in cryptocurrencies.

• Losing private key: If you lose your private key, you lose access to your tokens. If someone hacks into your digital wallet or otherwise knows of your private key, that person gains access to your tokens.

• Money-laundering and terrorist financing: Funds invested into schemes carry a higher risk of being misused for illegal activities due to the pseudonymous nature of the transactions. Investors are likely to be adversely affected if authorities investigate any alleged illicit activities related to the token issuer, its business activities, or the trading of the token.

• Insufficient secondary market liquidity: Even if the tokens can be traded in a secondary market, you may be stuck with them if there are not enough active buyers and sellers. Or if the bid-ask spreads are too wide.

• Authenticity of service providers: It is difficult to trace and verify the authenticity of the operator of trading platforms that are run online or outside Singapore. If a trading platform fails, you could lose all your money. In addition, establishing the credibility of token issuers could be hard. As with all start-ups, the failure rate tends to be high.

What protection do you have?

MAS will not be able to help you if you lose money from dealing with digital tokens that are not products regulated by MAS, even if the digital token service is provided by an entity regulated by MAS.

Some business conduct measures aimed at reducing consumer harm have been introduced for cryptocurrency service providers. In addition, retail distribution measures aim to provide retail customers with greater risk awareness, and limit risks which they can take.

However, MAS' regulatory measures cannot shield consumers from the risk of their cryptocurrency holdings losing value, or cryptocurrency service providers collapsing (for example, due to unsustainable business models, fraud, or excessive risk taking).

MAS does not license or regulate Decentralised Finance (DeFi) applications, which can be used to engage in activities involving cryptocurrencies such as trading, lending and borrowing, staking, and yield farming, without the need for an intermediary or service provider.

You may not be able to recover any of the cryptocurrencies or monies that you deposited with the service provider/ DeFi application if:

• They are stolen or lost due to hacking of your account, misappropriation

• The service provider/ DeFi application becomes bankrupt

• You encounter problems withdrawing funds from the service provider/ DeFi application

Crypto derivatives (e.g., futures, options, or Contracts For Differences (CFD) that reference cryptocurrencies) may be offered by brokers and cryptocurrency service providers. Currently, MAS’ regulations on crypto derivatives only apply to those listed on Approved Exchanges. 

Checklist

Before making any investment decision:

• Seek financial services from persons or entities that are regulated

• Make sure you fully understand the benefits and risks of the product or service before committing

• Assess whether the product or service meets your needs and is suitable for your appetite for risk

Always check before you invest:

• Check for red flags. Scammers use sophisticated tactics to get you to part with your money. There are red flags you can watch out for to steer clear of investment scams, such as high returns at low or no risk.

• Check that the platform that you are dealing with is regulated. Confirm such claims by checking the resources on the Monetary Authority of Singapore (MAS) website.

  • Financial Institutions Directory - a list of financial institutions regulated by MAS and the regulated activities they are authorised to provide

  • Financial Institution Representatives Register - a list of individuals who conduct activities regulated by MAS

  • Investor Alert List - a non-exhaustive list of persons unregulated by MAS who may have been wrongly misperceived as being licensed or authorised by MAS

• Check on the company’s background. Do not be too quick to believe everything you are told. Verify information provided by the entity about themselves or the investment opportunity, such as the background of representatives and the entity's track record.