There is much to reflect on regarding the recent Mirror Trading International (MTI) scam, which managed to attract serious Bitcoin investments, but then magically disappeared through what appears to be a multi-level marketing scheme. Investment scams like these don’t yet fall under any specific regulation as crypto-assets remain largely ungoverned. While the validity of MTI is still to be determined, the allegedly fraudulent firm now has many potential victims.

For investors embroiled in MTI, liquidation conclusions will hopefully bring this nightmare of unanswered questions to an end, but any profits made by said investors may need to be repaid.  A typical red flag is when early adopters, who often do very well in a tiered investment scheme, suddenly cash out and leave it all behind. Unfortunately, those left invested, or who join later don’t have nearly the same success or are left far worse-off. MTI’s ‘early bird’ investors allegedly made millions.”

Good and bad apples

While skulduggery does exist, there is a lot of good (and investment potential) in this asset class, but it’s sometimes difficult to spot the bad apples. Licensing is one of the keys to unlocking the potential of the bona fide providers, which will also promote investor, provider, and regulator clarity, as well as a consumer safety net. Some crypto-asset providers will typically seek jurisdictions that have loose regulatory requirements allowing for an easy path. It is best to give these a wider berth and to deal with locally registered providers.

Exchange controls are being re-assessed locally, with crypto-assets likely to be designated as financial products in terms of the existing FAIS legislation, thereby requiring a license. Government can’t wait for COFI (the Conduct of Financial Institutions Bill, currently in progress) to make this effective either, as regulating crypto-assets has become urgent, particularly given the exponential increase in investor appetite and investment spend. Covid-19 has been an accelerant to the growth of this asset class too.

Licenses are lekker

In terms of FAIS, if or when crypto-assets are designated as financial products, the crypto providers will need to be licensed to render services to consumers. It’s a great plan but it’s easier said than done. It works on the assumption that all crypto providers will want to be licensed. Some may seek legal opinion as to why they don’t need to be licensed and how crypto-assets are not strictly money, but I suspect that the majority will welcome regulatory clarity as this gives the industry legitimacy with stakeholders and customers.

In the meantime, the problem remains that fraudsters can operate in a regulatory vacuum. It’s essential for investors to undertake a due diligence when it comes to signing up for new investments, especially ones where cryptocurrency is involved. I doubt many investors truly understand the nature of this type of investment. Crypto-assets are still relatively new, and most investors don’t understand the detail. They are looking at newspaper headlines and their friends are questioning why they aren’t invested in crypto-assets.

The Financial Sector Conduct Authority (FSCA) announced it found no evidence of any successful trading at MTI, and advised disinvestment as soon as possible, but investors continued to pour in. You only need a few successes or good headlines to convince some to make the move to invest, and even sophisticated investors can be fooled.

Due diligence deters digital disasters

MTI is a shining example as to why we need to regulate crypto-assets, and why compliance protocols like KYC (Know Your Customer) are so crucial. Electronic funds are all too easy to camouflage and from an investor point of view, it’s essential to know where your money is going, and you need comfort that your investment is with a company that has been regulated (preferably locally) and has therefore gone through due diligence with the regulator. A licensed entity would need compliance, risk mitigation and verification in place, which collectively bring a sense of investor comfort.

In these modern times we can fall back on an old adage if ever in doubt. ‘If it is too good to be true, then it is probably not true.’

Article by Richard Rattue, Managing Director of Compli-Serve