Advisors might want to help their clients resist the current craze over cryptocurrencies and get them to focus instead on their risks.
The North American Securities Administrators Association, an association of state securities regulators, has issued a strong warning, saying the new digital currencies are subject to little or no regulation.
"Investors should go beyond the headlines and hype to understand the risks associated with investments in cryptocurrencies," Joseph Borg, NASAA's president and director of the Alabama Securities Commission, said in a statement.
Cryptocurrencies and investments tied to them are high-risk products with an unproven track record and high price volatility, he said, adding that they're "not for the faint of heart.”
NASAA warned that cryptocurrencies are susceptible to cybersecurity breaches or hacks, with potentially no recourse should the cryptocurrencies collapse. It also cautioned that they're highly reliant upon unregulated companies, including some that may be more susceptible to fraud and theft than regulated financial institutions. Their volatility and the fact that they're not insured by the FDIC were other concerns it raised.
The SEC applauded NASAA’s warning, stressing that cryptocurrencies “lack many important characteristics of traditional currencies, including sovereign backing and responsibility, and now are being promoted more as investment opportunities than efficient mediums for exchange.”
Cipperman Compliance Services predicted – not very long ago – that the SEC will regulate cryptocurrency offerings. Cipperman expects the SEC to issue rules as it has already said that it should do so.
Regulation may not be bad for this emerging industry in the long term. After all, significant regulation made mutual funds the most popular investment vehicle of the last 100 years.