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Crypto Assets - Risks

All investments carry risks, and crypto assets are no exception. Be mindful of the following realities of investing in the evolving world of crypto assets.

  • Crypto assets are risky and often extremely volatile. Crypto assets have experienced higher levels of volatility relative to more traditional investment assets, meaning that price swings—and any investment value—may go up and down dramatically and unpredictably, and the risk of losing all of your investment is significant. Crypto assets are also less liquid than more traditional financial instruments like stocks and bonds, which can exacerbate price volatility and make it more difficult to sell.
  • Registration of crypto assets—and crypto asset entities—is limited. Under federal securities laws, securities and the people or entities that offer or sell them typically must be registered. Registration of a securities offering or entity provides important investor protection through rules related to, among other things: disclosure of information about the company, offering and securities being offered; custody of assets; conflicts of interest; standards of conduct; and minimum capital requirements. Whether a particular crypto asset or crypto asset activity is a security depends upon whether it meets the definition of a security under federal securities laws. Unregistered crypto assets, crypto asset broker-dealers and crypto asset exchanges might not provide important investor protections.

    To find out if a broker-dealer is registered, search BrokerCheck. To find out if an asset is registered as a security, check with the SEC.

  • SIPA coverage might not apply. Crypto assets that aren’t securities as defined in the Securities Investor Protection Act (SIPA) aren’t protected under SIPA. Even some crypto assets that are securities under other federal securities laws or that are offered and sold as securities under those laws might not be securities under SIPA—in which case, protections afforded to securities customers through SIPA might not apply, even if those crypto assets are held by a broker-dealer that’s a member of the Securities Investor Protection Corporation (SIPC). In particular, an “investment contract” that’s a “security” under other federal securities laws isn’t a “security” under SIPA unless it’s also registered with the SEC under the Securities Act of 1933. Learn more from SIPC about the protections afforded to customers under SIPA and find answers to questions about SIPC customer protection.
  • You might interact with unregistered entities. When buying, selling or storing crypto assets through an affiliate of a broker-dealer or another third party with which the broker-dealer has established an arrangement, investors might interact with an entity that’s subject to more limited regulatory oversight or where regulatory clarity is lacking. In these situations, be aware that the entity might not operate under the same investor protection rules and regulations as the broker-dealer.
  • Scams and fraud abound. Bad actors continue to exploit investor demand and public interest in crypto assets to perpetrate fraud, including through Ponzi schemes, pyramid schemes, pump and dump schemes, the sale of fake coins, phishing scams, romance scams, “pig butchering” scams, and other forms of market abuse and fraudulent tactics. The pseudonymous nature of crypto assets is another reason behind bad actors’ focus on this space. Whatever the scam, once assets are sent, they’re generally gone for good.
  • Theft happens. Theft of crypto assets is a significant risk, and some crypto asset service providers might be better at protecting against cybersecurity risks and theft than others. There are many touchpoints where something can go wrong (such as with crypto wallet providers), and many of these entities might be operating internationally and without any regulatory oversight. As in the case of scams, recovery of stolen crypto assets is rare.
  • Spoofing is real. Bad actors have tried to lure unsuspecting investors into storing their public and private keys with fake crypto asset service providers. Fraudsters might befriend investors and entice them to move their crypto asset wallets to a different (fraudulent) crypto asset service provider, or they might fraudulently pose as tech support staff for legitimate crypto asset service providers. It’s important to carefully vet an institution before using its service.
  • Tokens might not be received and might have little utility or worth. For crypto assets that are contingent on certain triggering events—such as ICOs contingent on the development of a new enterprise and a related future public sale of tokens—the triggers might not occur, and you might not receive the associated tokens. Even if you do receive tokens, they might be worth nothing or might be redeemable only for goods or services by the token issuer. Furthermore, there might be no ability to trade or exchange tokens.

Remember: Never invest more than you can afford to lose. Investing always involves some degree of risk. Two key investing principles—asset allocation and diversification—are critical to managing investment risk.

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