The Financial Sector Conduct Authority (FSCA) issued a “health warning” on crypto assets on Thursday, after receiving a large number complaints from South Africans who have lost their savings through crypto-related investments.
Crypto-related investments are not regulated by the FSCA, though draft proposals for regulation were issued last year which would bring cryptos under the Financial Advisory and Intermediary Services (Fais) Act.
“As a result, if something goes wrong, you’re unlikely to get your money back and will have no recourse against anyone,” says the FSCA statement.
Crypto-assets – also called cryptocurrencies – are digital representations of value that are not issued by a central bank.
The FSCA warns of the following risks:
- Crypto investment firms may be overstating the likely payouts, or understating the risks;
Investing in crypto assets, or investments and lending linked to them is high risk and those who participate should be prepared to lose all their money;
- There’s no guarantee that crypto assets can be converted back to cash, which puts investors at the mercy of market supply and demand; and
- The price of crypto assets is determined by market sentiment, making it extremely volatile. Multi-level marketing and Ponzi schemes are able to exploit fears of being left out, which draws in new investors, so further driving up the price of highly volatile assets.
Regardless of their risk appetites, the FSCA urges investors to allocate only a small percentage of their portfolios to cryptos.
It then issued the following scam alert:
- The risk of losing all of the money invested in schemes promising high returns means that prospective investors should, before investing, obtain proper advice regarding the overall suitability of such a high-risk product in their investment portfolio and the impact on it should it fail.
- Investors are urged to invest with open eyes as to the high risks involved, understanding that these types of investments are not appropriate for the vast majority of the South African population and that more appropriate and balanced investment products are available and offered by licensed financial service providers regulated by the FSCA.
- Do not be pressured to go with the flow and do 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 long-term wealth creation and preservation.
The FSCA says it is working with the Intergovernmental Fintech Working Group (IFWG) to better understand and regulate “where appropriate”, crypto assets in SA.
It also advises retirement fund trustees to remain vigilant in their fiduciary duties before allowing investment managers to expose their fund assets to cryptos.
“The FSCA currently discourages such investments by retirement funds until regulation has been finalised to safeguard investors,” says the statement.