What Are Cryptocurrencies?
Technically speaking, cryptocurrencies are digital coins, tokens or currencies that rely on distributed ledger technology and cryptography to permit the decentralized and secure holding and transfer of the value or interest represented by the coin, token or currency.
In non-technical terms, cryptocurrencies may act as a store of value (like money), perform a function or represent an interest in an asset or enterprise. They include virtual currencies like Bitcoin and a large variety of other coins and tokens, many existing cryptocurrencies can be purchased by members of the public through a variety of trading platforms or in private transactions. New cryptocurrencies are being created constantly and are often offered for sale to members of the public through initial coin or token offerings.
Things to Consider before investing
Do Canadian securities laws apply to cryptocurrencies? Some cryptocurrencies are considered a security under Canadian securities laws. Canadian Securities Administrators Staff Notice 46-307 – Cryptocurrency Offerings provides guidance as to when a cryptocurrency might be considered a security.
Some cryptocurrencies are not considered a security under Canadian securities laws and are not subject to oversight and regulation by any securities regulatory authority in Canada.
Canadian securities laws may also apply if the cryptocurrency forms the holding of an investment fund or forms the underlying interest of a futures contract or other derivative.
What should I consider before buying a cryptocurrency? You should carefully consider the following risks before making any decision to purchase a cryptocurrency:
Lack of Regulation: Many cryptocurrencies are not securities or derivatives. As such, they are not subject to regulation under Canadian securities laws and may not be subject to regulation under any foreign laws.
In an unregulated environment, investor protections designed to provide appropriate disclosure and prevent misrepresentations, market manipulation and other harmful practices do not exist. In addition, unregulated cryptocurrency trading platforms and dealers are not subject to any oversight or rules concerning their conduct or the protection of client funds, assets and personal information. This lack of regulation increases the risk of you losing all of your investment.
Some of the risks arising from lack of regulation include the following:
- There is no government backing the cryptocurrency and often there is no inherent value to it.
- There is no insurance covering losses in the cryptocurrency.
- There may be little or no regulatory oversight, meaning that in respect of the people who created the cryptocurrency or operate the exchange on which it trades:
- there have been no criminal or other background checks performed
- they may have little or no financial resources
- they may have little or no experience
- there may have been no independent assessment of any of their claims or statements
- The anonymous nature in which cryptocurrency can be traded can attract investment by parties engaged in illegal businesses.
Volatility: Trading in many cryptocurrencies has been extremely volatile. Investors may lose all their investment.
The value of a cryptocurrency is often determined solely by the public’s interest in it and current levels of supply and demand. There is often no inherent value to it. Media coverage of a cryptocurrency can have a major impact on its value over a short period of time without any organization or mechanism mitigating volatility. The price of a cryptocurrency may be driven primarily or solely by speculative demand that may be unsustainable. The resulting volatility can result in dramatic fluctuations in the value of your investment. A collapse in demand for a cryptocurrency may result in you losing all or most of your investment.
Liquidity: It may not be easy or cost-effective to trade your cryptocurrency for another cryptocurrency or for money that is legal tender. There is limited liquidity in some cryptocurrencies and prices and bid-ask spreads (that is, the spread between the price sought by a seller and the price offered by a buyer) may vary widely across cryptocurrency trading platforms. Cryptocurrency trading platforms may limit or suspend trading, or there may be limitations or suspensions imposed on funding and withdrawals from accounts. These risks may limit your ability to liquidate your investment on a timely basis or without significant expense.
Loss through fraud, theft or hacking: Cryptocurrencies are intangible assets susceptible to loss through theft, hacking and the compromising or loss of digital wallets and keys. Because cryptocurrencies are typically sold on-line, their creation and sale may be by persons located in foreign jurisdictions over whom it is difficult for law enforcement agencies to monitor or take action. Because trading in cryptocurrencies is largely anonymous, it can attract parties engaged in illegal businesses and with unscrupulous practices. These characteristics make cryptocurrencies attractive to those intending to perpetrate scams and fraud. These risks could result in the loss of your investment.
What should I consider if I want to start a business involving cryptocurrencies? Please click here to learn more about starting a business involving cryptocurrencies, including:
- Dealing or advising in cryptocurrencies
- Starting a cryptocurrency trading platform
- Initial coin offering or token offerings