Episode 65: Crypto-assets for first time investors
25 June 2021
In this episode, Communications Adviser Louise Tapsell discusses crypto-assets for first time investors with Hema Raman, Crypto-Asset Coordinator at ASIC. If you're thinking about investing in crypto-assets, hear from ASIC on what to think about and look out for before you invest.
Podcast length: 15 minutes 8 seconds
Speaker notes (may vary slightly from podcast recording)
Louise Tapsell: Hello and welcome to the official podcast of the Australian Securities and Investments Commission, I’m Louise Tapsell.
In 2017, the crypto asset Bitcoin shocked the market by reaching an unforeseen peak, valued at over $19,000US. The price was driven by individual investors, excited by new technology. Not long after, in late 2018, Bitcoin’s future looked troubled, with a value just over $4000.
In 2020 and 21, we’ve seen a resurgence of Bitcoin, reaching and then surpassing 2017 highs with prices propelled by institutional investors, rather than individuals. Bitcoin‘s value peaked at $65,000 in April 2021. Now, with some high-profile investors on board, many are wondering whether crypto assets are the way forward.
ASIC’s approach to regulation in this space has always been to encourage new technology but to also protect retail investors, as many have been caught buying into fake crypto-assets. At ASIC we are also aware that the precise legal and regulatory status is still evolving as the sector itself evolves.
Today I am joined by Hema Raman, Crypto-Asset Coordinator in ASIC’s Market Infrastructure team to discuss crypto assets, ASIC’s role and what investors may want to think about before investing in a crypto asset.
Hema Raman: Hi Louise.
Louise: Firstly, what are crypto-assets?
Hema: In a nutshell, crypto-assets are digital representations of assets that use cryptography and other technology such as distributed ledger technology to provide security and other features. They may be a digital representation of another asset such as a dollar or a prepayment for a service, or they may represent nothing at all.
Louise: The Wall Street Journal has said that with safe assets yielding close to zero, investors have been more willing to place bets on risky assets in the hopes of reaping big gains, and a Crypto-asset like Bitcoin is among the riskiest assets in the market.
Why are people tempted to invest in investments like crypto assets?
Hema: Well firstly, if we have a look at the Australian economic environment, we’re looking at low interest rates in 2021 – and expected to remain low for some time. When interest rates are low, that flows onto low returns on savings. What we’re observing is that investors – including first time investors – are looking for investment opportunities that produce high returns with, what they may perceive as guaranteed returns. While this can make crypto assets like Bitcoin and others appealing, there’s no such thing as a guaranteed high return.
What needs to be clear is that Bitcoin, and other forms of crypto assets, are volatile assets. That $65,000 peak in April was followed days later by a 29% slump, so although some people came out on top, others didn’t.
Louise: Perhaps, what I have done here is put Bitcoin and all other crypto assets in the one basket, and that might be a common mistake?
Hema: Yes, crypto assets are all very different. Some may be or involve financial products that ASIC regulates, and others may not.
Bitcoin is the first crypto asset that used technology to ‘automate trust’ and remove the need for a middleman, or financial intermediary, between two individuals to complete a trade. It has been available and actively traded for over a decade and its supply is limited. Decisions are made on a collective basis i.e. there is no issuer or entity sitting behind Bitcoin. It is still highly volatile like other crypto assets but so far, has maintained its monetary value.
What is important to note is that all crypto assets won’t perform like Bitcoin. Investors shouldn’t think that because Bitcoin is performing well, that another crypto asset, that may be cheaper to buy, will produce the same gains for investors.
Louise: So, as a first-time investor, let’s say I decide to invest in a crypto asset. Would I be protected?
Hema: The platforms where you buy and sell crypto-assets are likely not regulated by ASIC. So, you could be buying off a platform without necessarily having any recourse if things fail.
Louise: Unlike say, the ASX, where you may buy shares of a listed company. The ASX has a licence responsibility to ensure a fair orderly and transparent market and other responsibilities under the Corporations Act.
Hema: Yes, and not all crypto-asset platforms are registered in Australia, even though some are registered through AUSTRAC for anti-money laundering purposes, but this does not offer you protections as an investor.
If something were to go wrong, you won’t be able to take your complaint to the Australian Financial Complaints Authority (AFCA).
Some better run crypto-asset trading platforms may manage this well, even if they are not regulated by ASIC or members of AFCA.
As a first-time investor, it is always important to consider if you are willing to lose some or all of the money you have invested and for you to know that you’ve made an investment decision with little or no protections behind you, especially if your money has gone overseas.
Louise: And you were telling me earlier that there are some 700 different crypto assets available globally?
Hema: Yes, and that number is changing rapidly. It’s not as simple as, I like the sound of Bitcoin, I will invest in something similar. There are a lot of different assets offered on different platforms and a lot of intricacies to the technology to be understood so you can make appropriate enquiries. For example, ‘hot’ wallets held online are much more susceptible to hacks than hardware or ‘cold’ wallets held offline.
Louise: And we are seeing more institutional appetite for crypto-assets?
Hema: There are different perspectives on this, but yes, there is a growing push for crypto-assets to be accessed via more traditional investment products, such as an Exchange Traded Fund or ETF that invests in crypto-assets. Early days yet, but we can see significant sections of the market apparently getting ready for at least some areas of the crypto-universe to become more ‘mainstream’.
Louise: So where are these crypto assets traded? If you don’t go to a listed exchange such as the ASX, where do you go?
Hema: People buy and sell crypto-assets on specific crypto asset trading platforms. There are lots of these platforms, with new ones springing up on a regular basis. Some of these platforms are based overseas.
If these platforms are dealing with crypto-assets that are also considered financial products under Australian law, then they need to be licensed by ASIC and it’s up to the platform operators to make an assessment of the crypto-assets they offer given how different and complex they could be.
Crypto assets are highly speculative investments and what ASIC has been clear on is that these are investments that are online, global and complex.
Louise: Online, global and complex, yes.
So, I could be trading on a platform based overseas, that may not be regulated. Or I could be going online, sending my money overseas and be at risk of fraud.
Hema: This is tricky because of the nature of crypto – like we say, it’s technologically complex, global and online, and these features make it very difficult to distinguish legitimate businesses from unscrupulous operators, or scams, who are seeking to capitalise on the hype around crypto-assets to steal people’s money.
Also, you're not protected if a platform fails or is hacked. In a lot of countries, like Australia, crypto assets are not recognised as legal tender. You're only protected to the extent that they fit within existing laws.
If you’ve invested in a crypto asset that you thought was legitimate but ended up being fraudulent or a scam, and this can be easy to do, you risk losing all of your money. Once money is overseas, it’s likely gone and crypto assets are even harder to trace or recover than money.
Louise: And I suppose, this is the same with any scam, when you send money overseas you are taking a big risk. It could be a romance scam or whatever. The scam is interchangeable. It’s just recently, we are seeing a lot of crypto offerings and therefore more crypto-related scams.
Hema: Yes, and when you and I talk about it, we are talking about first time investors or people considering crypto asset investments for the first time. ASIC stresses that these types of investments shouldn’t be rushed into by investors who are yet to understand the complexity of the crypto asset environment.
But as I mentioned, there is more appetite from the financial services industry to start embracing crypto-assets, although these talks are at the very beginning. Crypto-assets may gain a higher level of market acceptance down the road. The space is evolving.
Louise: So, Hema, when people are buying and selling these crypto products, are they doing so as lone investors in a day trader capacity, or are there particular investment institutions that specialise in crypto-assets?
Hema: Most of the investment we see in crypto assets was coming from individual investors, but we are now seeing institutions getting into this space from the end of 2020.
Louise: How are crypto-assets regulated by ASIC?
Hema: It depends. If the crypto-asset or token falls within the definition of “financial product” in the law, then that asset would be regulated in a similar way to other investments. Among other things, this involves the person issuing the asset being required to hold an Australian financial services licence, or AFS, licence.
Louise: Is this part of the appeal of crypto-assets perhaps, that they can exist outside of regulation? If the crypto-asset is a financial product, such as a derivative or managed investment scheme, the issuer would then be bound by the Corporations Act, by licensing requirements… Is this the appeal, that they are not bound by these?
Hema: It’s clear that investors are enthusiastic about investing in a new technology and the opportunities this brings, but, of course, anything that is offered outside of regulation comes with some risk. Obviously there are regulated financial products that are high-risk, but if you’ve invested in something new, something not regulated, you may be on your own if the investment falls through.
Much of these opportunities are better managed by the existing large players such as regulated exchanges and existing investment managers who could be safer investment options for first-time investors.
Louise: And would it be right to say that if you deal with an Australian Financial Services Licensee, you have access to a free, independent dispute resolution scheme via AFCA. But if you deal with crypto-assets, you play on the perimeter and you don’t have access to these schemes.
Louise: Speaking with an independent financial adviser is a good first step for those contemplating crypto asset investments for the first time. ASIC also has a register of Australian Financial Services licensees to check to make sure any party promoting or issuing a financial product is licensed or is authorised by a licensee.
Hema, ASIC has received reports about crypto scams. Tell me more about that.
Hema: The COVID-19 period, where people are tempted by high returns and looking for what appear to be better-performing investments, has seen an increase of reports of misconduct to ASIC generally, even into 2021. We’ve seen investors being emailed or called by scammers convincing them to sign-up to crypto-asset trading and deposit funds into a crypto wallet or bank account.
Louise: From my understanding, for one particular scam, when investors logged into their account it looked as though they’d made huge profits, but it was all fake data. They are encouraged by scammers to invest more but once they ask to withdraw their funds, scammers either disappear or ask for cash to release the funds.
Hema: Scammers are also using the interaction to get your personal information too, which can lead to identity fraud.
Reports of scams received by ASIC indicate that many financial and investment scams, as well as crypto scams, have similar traits. Scammers often:
- present a range of investment offers – from modest returns to high returns – that sound safer than they are
- make persistent requests to continue investing despite no evidence of actual returns
- display fake endorsements from celebrities or government agencies, including ASIC
- request money be paid to a person or company into multiple or constantly changing bank accounts.
Louise: If you believe you’ve been scammed, contact your financial institution as soon as possible. You can also report misconduct on the ASIC website. ASIC’s Moneysmart website also has a page on crypto-assets and what to look out for.
Thank you to Hema for speaking with me today and taking me through the cryptocurrency for first-time investors.
For those who wish to undertake legitimate work in this space, we would encourage you to read Info sheet 225 on the ASIC website. This is a resource for industry on ASIC’s regulatory role when it comes to crypto-assets. Then approach the ASIC Innovation Hub to discuss your business models.
You can keep up to date with our enforcement work by subscribing to our media releases on the ASIC website.
If you have any feedback on this podcast, send us a tweet to @ASICmedia. We’d love to hear from you.