SEC warns that cryptocurrencies may pose systemic risk

Cryptocurrency businesses are becoming large enough to have their problems spill over into the broader financial system, creating a potential systemic risk, according to the US Securities and Exchange Commission (SEC).

Speaking to the Financial Times, SEC chair Gary Gensler said that digital asset trading platforms are now a $2 trillion industry while some coins, like Tether, are backed by fiat currencies.

Gensler had previously reiterated the need for a regulatory framework that can help crypto investors ward off scams and other related risks, saying that cryptocurrency’s relevance in the next five to 10 years would be highly dependent on a public policy framework. Supporting this statement, he said that “finance is about trust, ultimately.”

His comments come in the same week that the SEC published a new alert about investment scams related to digital assets and cryptocurrency.

The announcement, shared by the SEC’s Office of Investor Education and Advocacy and the Division of Enforcement’s Retail Strategy Task Force, highlighted the potential “devastating losses” faced by retail investors due to scams.

The SEC attributed the “rising popularity” of initial coin offerings, including cryptocurrencies, as the main reason for growing scams and exploits.

The SEC also said that the price surge of certain digital assets has been a key factor for scammers to lure unsuspecting investors:

“Investors may be less skeptical of investment opportunities that involve something new or ‘cutting-edge,’ or may get caught up in the fear of missing out (FOMO).”

Investors’ FOMO was mainly attributed to the recent bullish performance shown by numerous tokens and nonfungible token initiatives. The alert acknowledged that one of the main reasons for FOMO among investors is the mindset that “they will miss an opportunity to become very wealthy”.

To help investors stay in the clear, the SEC suggested that digital asset investors understand and evaluate the risks in addition to looking out for warning signs for a possible scam, including promises of high investment returns, unclear license and registration status, and fake testimonials.

The SEC also highlighted recent huge losses for retail investors related to BitConnect:

“The platform allegedly paid investor withdrawals out of incoming investor funds and did not trade investors’ Bitcoin consistent with its representations, leading the platform to collapse and investors to lose massive amounts of money.”

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