According to recent data from the North American Securities Administrators Association, investments in cryptocurrencies and digital assets are the largest threat to investors "by far" (NASAA).
"Stories of 'crypto millionaires' enticed some investors to try their hand at investing in cryptocurrencies or crypto-related investments this year, and with them, many stories of those who bet big and lost big began to emerge, and they will continue to emerge in 2022," said Alabama Securities Commission Director and Enforcement Section Committee Co-Chair Joseph P. Borg.
Investors should exercise caution before purchasing popular and volatile unregulated products, especially those involving cryptocurrency and digital assets, according to the annual survey of North American securities authorities.
"A guarantee of big profits with no risk is the most prevalent warning indication of an investment fraud." "It's critical for investors to understand what they're investing in and with whom they're dealing," said NASAA President and Maryland Securities Commissioner Melanie Senter Lubin.
"An investor's best defense against investment fraud is education and information," Lubin concluded.
According to the research, because digital assets "may not fit neatly into the existing investor regulatory framework," proponents of these goods may find it simpler to "scam the public."
"Before you get into the crypto frenzy, keep in mind that cryptocurrencies and associated financial instruments could be nothing more than public-facing fronts for Ponzi schemes and other scams," warned Joseph Rotunda, Vice-Chair of the Enforcement Section Committee.
Investments in cryptocurrency trading programs, crypto mining pool interests, crypto depository accounts, and securitized tokens, according to Rotunda, should "be regarded for what they are: exceedingly speculative speculation with a substantial potential of loss."
Scammers made a record $14 billion in cryptocurrencies in 2021, according to blockchain analytics firm Chainalysis, thanks in major part to the rise of decentralized financing (DeFi) businesses.
DeFi is a rapidly emerging segment of the crypto industry that uses blockchain technology to cut away middlemen, such as banks, from typical financial activities like acquiring a loan.
Due to a rise in theft and scams, losses from crypto-related crime grew by 79 percent year over year.
Scumming was the most common cryptocurrency-related crime in 2021, followed by theft, the majority of which was conducted through cryptocurrency firm hacking. According to Chainalysis, DeFi is a significant part of the story for both, which is yet another cautionary note for those interested in this expanding segment of the crypto market.
Many of the current fraud concerns to investors include private offerings, which are free from federal law registration requirements, according to NASAA. Investor protection regulations relating to these private securities are likewise precluded from enforcement by states.
"Unregistered private offers are high-risk investments that don't have the same investor protection obligations as those traded on public markets," Borg explained.
Finally, state securities officials advise that if something sounds too good to be true, it most likely is.
Some DeFi platforms, for example, provide consumers with substantial returns in the form of high-interest savings and lending products.
Bad actors sometimes tempt new investors by promising safe, rich, guaranteed returns over a short period of time - "sometimes measured in hours or days rather than months or years," according to NASAA, which considers such claims to be a red flag for fraud.
The survey's top concerns to retail investors included fraud offerings relating to promissory notes, money scams presented online and via social media, and financial schemes linked to self-directed Individual Retirement Accounts.