BMA issues consumer warning over digital asset investments

Created: Nov 15, 2022 07:53 AM

BMA: issues notice to consumers about understanding a product and its risk (File photograph)

The spectacular collapse of FTX Trading Ltd, the world’s second-largest crypto currency exchange, has prompted the Bermuda Monetary Authority to issue a warning to consumers: understand a product and its risk before entering into any agreement.

Bahamas-headquartered FTX, founded and led by Sam Bankman-Fried, shocked the crypto world by filing for bankruptcy protection on Friday.

Reuters news agency reported that as much as $2 billion of client funds could be missing.

The US Securities and Exchange Commission, the Department of Justice and the Commodity Futures Trading Commission have launched investigations involving FTX and Mr Bankman-Fried, who stepped down as chief executive, amid the controversy.

The parent of a Bermuda-based fintech company has stopped permitting customer withdrawals and had its California lending licence suspended in the wake of the collapse of FTX.

BlockFi, which was set up as a digital asset lender and was rescued by FTX earlier this year, said it was pausing withdrawals.

In May, BlockFi took an $80 million hit from the bad debt of crypto hedge fund Three Arrows Capital, which imploded after the TerraUSD stablecoin wipeout.

The BMA said digital asset technology is growing in adoption among traditional and digitally native businesses, and the sector has significant retail participation.

It added that the field of digital assets is wide-ranging, from non-fungible tokens/art ownership rights and supply chain/climate tracking to investment and payment products, as examples. The level of risk associated will vary according to the use case and product design.

The BMA, while not referring to FTX by name, added: “It is important for the public to understand the product and its risk before entering into any agreement. The damaging losses arising from institutional failures within the digital asset sector in both May 2022 and occurring now demonstrate the significant risks arising from certain digital asset products.

“Generally, for any financial product, there is normally a positive correlation between potential returns and risk. The potential for higher returns tends to be associated with higher risk. The authority wishes to remind the public to deal prudently and understand the risks associated with any financial instrument.

“Before a customer enters into an agreement, the customer should have regard for their ability to absorb potential losses arising from the crystallisation of risk.

“It is advisable that the public seek regulated financial institutions; however, while regulation significantly reduces the chances of financial institution failure, such does not entirely eliminate the possibility of failure, as has been witnessed across all financial sectors and in all jurisdictions.

“Accordingly, it cannot be overemphasised that it is critical for a customer to understand the product and consider both the product’s associated risk and the customer’s ability to absorb losses.

“While it is not a substitution for a customer’s own due diligence, Bermuda businesses licensed under the Digital Asset Business Act 2018 are also required to disclose material risks to customers.

“Customers should read all product information and contractual agreements and ask the digital asset business questions when either in doubt or for confirmation of understanding.”

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