MAS warns of dangers in using digital tokens

One hazard relates to money laundering and terrorist financing.

The Monetary Authority of Singapore (MAS) and the Commercial Affairs Department (CAD) has flagged some concerns regarding the emergence of initial coin offerings (ICOs) and other investment schemes involving digital tokens.

MAS laid out several risks consumers should watch out for when it comes to dealing with digital tokens.

One such risk relates to foreign and online operators. The central bank said a consumer is exposed to heightened risk of fraud when investing in schemes that operate online or outside Singapore.

"As these operators do not have a presence in Singapore, it would be difficult to verify their authenticity. Should the scheme collapse, it would also be difficult to trace the scheme’s operators. The recovery of invested monies may also be subject to foreign laws or regulations, which may not be the same as Singapore’s," MAS said.

Additionally, there are also risks relating sellers without proven track record and to the insufficient secondary market liquidity.

"Even if digital tokens are tradable in a secondary market, in practice, there may not be enough active buyers and sellers or the bid-ask spreads may be too wide. Consumers may not be able to exit their token investments easily. In the worst case scenario where no secondary market develops, a consumer may not be able to liquidate his token holdings at all," MAS said, noting that these exchanges or platforms that facilitates secondary trading of digital tokens may not be regulated.

There are also risks relating to highly speculative investments. The regulator said the valuation of digital tokens are usually not transparent, and highly speculative.

It pointed out, "Where digital tokens do not hold any ownership rights to the seller’s assets, the digital tokens would not be backed by any tangible asset. Such tokens would be merely speculative investments and their traded price can fluctuate greatly within a short period of time."

MAS also warned of the dangers relating to investments promising high returns.

"High returns could come in the form of high referral commissions, i.e. promising consumers benefits for referring additional participants. In fact, such commissions would increase operating costs, which could lower the chances of achieving the returns," it explained.

Lastly, the central bank said these ICOs and digital tokens are within the risks of money laundering and terrorist financing.

"Consumers would be adversely affected if law enforcement agencies investigate any alleged illicit activities related to the token investment scheme," it stated.

In a nutshell, MAS recommends consumers to make sure they fully understand the benefits and risks of the product or service before committing and assess whether the features of the product or service offered meets their needs.

The central bank also suggests consumers to confirm the credentials of those involved in deals using ICOs by consulting with the resources from the central banks.