The proliferation of cryptocurrencies started with the creation of Bitcoin in 2009. The popular (and sometimes infamous) currency continues to operate in a grey area when it comes to Canadian laws and regulations. At this point, can potential backers ignore cryptocurrencies, or should they dive in and invest?

In a recent episode of Navigator’s Banking on Blockchain series, The Wild West of Blockchain, Dr. Shamsul Alam, associate dean and finance professor at the University of Lethbridge’s Dhillon School of Business, says that unlike our Canadian dollar, which is a legal tender, bitcoins and other cryptocurrencies are essentially virtual money and not backed by the Bank of Canada. But that doesn’t mean they should be ignored.

“Everyday, cryptocurrencies are popping up like mushrooms,” says Alam. “But they’re here to stay. They will transform the way we do business and the economy.”

The episode also featured Zach Masum, manager of Legal Services (Capital Markets Regulation) with the B.C. Securities Commission. According to him, investors need to do their due diligence before making the leap to invest.

Here are a few things to keep in mind:

1.     Understand exactly what you’re purchasing

When cryptocurrencies or crypto-assets are being offered, they’re accompanied by white papers ranging anywhere from two pages to 40 pages. These white papers provide details on why a perspective investor should invest in a company’s particular currency or asset; all the services the company offers that relate to the currency or asset; the problems that will be solved by the product; the team behind the currency and their mission or goals; how the currency or asset is transferred to the investor and/or used by network users; and any other technical or financial details about the product. Investors should read these white papers carefully to ensure they understand what they’re investing in or purchasing.

2.     Know where the cryptocurrency originates from

If the currency you want to buy or invest in is part of an Initial Coin Offering (ICO), which means that it’s a relatively new cryptocurrency venture, find out where the company that is offering it is based. Investors should be aware of where the assets is coming from—whether foreign or domestic – in case issues like fraud arise in the future. Companies located in a foreign jurisdiction or who do not disclose their place of operation could be harder for investors to deal with down the road should any problems arise with your investment.

3.     Investigate the legitimacy of the cryptocurrency company

In 2017, The United States’ Securities and Exchange Commission’s new cyber unit filed charges against a Quebec cryptocurrency company—the first charges they have ever laid— for scamming backers out of their investments.

Ensure you examine the credential of the company and its team who are offering the currency or asset. There can be varying degrees of legitimacy to companies or teams and fraud has occurred in the past where representatives from companies are not who they say they are.

4.     Know that crypto-assets or currencies are volatile

Simply put, what goes up can also go down. Bitcoin reached its highest value in December of 2017. The currency was initially trading as if it were a penny stock, then surged to over $19,000 USD in 2017 and shortly after dropped to one third of that price in January. It has also had many other ups and downs in its history. Like other commodities, purchasers need to consider the volatility of cryptocurrencies and be prepared to deal with both its rises and falls.

5.     Understand the laws that are in place to protect you

There are consumer protection laws at the federal level and in different provinces in Canada. Investors or buyers of cryptocurrencies or crypto-assets should look into these laws that could apply to their purchase if they run into any issues.

6.     Be able to recognize the warning signs of fraud

From pressure tactics to “exclusive” offerings, there are warning signs that a purchaser should know about before they invest in or purchase a cryptocurrency or crypto-asset. The B.C. Securities Commission goes into detail on what those warning signs of fraud may look like, as well as other investment tips.

This article is based off of the podcast episode “The Wild West of Blockchain”, part of Navigator’s “Banking on Blockchain” series. If you want to hear the whole podcast in its entirety, you can listen in here.

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