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With interest in crypto-coins and NFTs on the rise, and more and more regular members of the public buying into digital assets, we briefly explore the risks involved in this highly unregulated fin-tech area.
Caveat emptor is a well-known legal doctrine which literally translates to ‘buyer beware’. The value in digital assets is gained in the same way as we apportion value in tangible assets, such as gold, oil, and diamonds. It’s based on a finite supply, increased demand, and the ability to trade in that asset. Just as you wouldn’t enter those markets blindly, you should always go into digital asset investment with your eyes wide open. Conduct your own research into the specific crypto currency or NFT, which you are intending on purchasing. Speak to other individuals in the same field who may already have a substantial crypto portfolio.
Blockchain technology is revolutionary, and it will continue to thrive, but we are still in the experimental stages and this is why there is a lot of uncertainty in this sector, which also drives the wild fluctuations in the value of digital assets. Whilst blockchains are immutable, and are largely seen to be ‘un-hackable’, there have been a number of recent high-profile hacks, and so it would be prudent for public investors to fully understand the risks involved before delving into digital investment.
Bored Ape Yacht Club (BAYC) have developed some of the most sought after NFTs. Their Instagram account was recently hacked and the hackers are known to have stolen around $3million worth of assets. This was a highly sophisticated hack and investigations are ongoing into how this occurred.
Last month, hackers stole around $600million from a blockchain network gaming platform, Axie Infinity, which is said to be the biggest crypto heist to date.
OpenSea were also subject to a phishing scam earlier this year, and a number of tokens were stolen as a result.
Until global regulation is enforced, unfortunately, sophisticated hacks like this will continue to occur and we will likely see an increase. This shouldn’t put investors off, because blockchain has unfathomable potential, but you should always be aware of the risks involved particularly as there may not be a way to recover any losses. Hackers, like regular criminals, will exploit any vulnerabilities, either in you as an individual, or in the technology.
Some jurisdictions have been quick to act. Dubai’s Regulation of Virtual Assets (DVAL) came into force on 11 March 2022. The law regulates virtual assets and applies throughout Dubai, including free zones and special development zones. Whilst the US does not regard cryptocurrency as legal tender, and there hasn’t yet been a consistent approach by States, they are developing a federal framework. Malta and Gibraltar are largely seen to be global leaders in crypto regulation. Singapore, Australia, Japan and the UK are had also developed their own framework and legislation. China has gone with a nuclear approach and it has banned the use of cryptocurrency, mining, and crypto exchanges.
As with the rise of any risky activity, there will be a rise in insurance products available for digital assets. Cyber insurance policies have been around for a while but underwriters have also added to this cover for crypto currencies, smart contracts and wallets. If you are thinking of investing, or already hold crypto assets, then you should seriously consider whether you want to take out insurance. A Lloyds of London syndicate have backed cryptocurrency insurance for Coincover, which provides insurance against theft or malicious hacks.
In summary: -
· Do your own research. Don’t just buy something because everyone else is, without doing your own due diligence first.
· Keep your details private and secure. Update your security settings.
· Look at Crypto insurance to determine whether there’s a suitable policy.
· Spread your risk.
· If in doubt, sit it out (unless you thrive on high-risk investments!).
· And finally, the golden rule - Only invest what you can afford to lose!
Whether you’re a company launching a new cryptocurrency, NFT, or metaverse, or if you require dispute resolution in the crypto space, then speak to our specialists to see how Mezzle Law can help you.
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