Questions and Answers for Investors on Cryptoassets
1. What are cryptoassets?
Crypto assets are digital representations of blockchain technology-based assets not issued by a central bank, credit institution or electronic money institution and may be used as a form of payment in a community that accepts or serves other purposes such as the assignment of the right the use of certain goods and services or a financial return.
To this end, the term "crypto" encompasses the nomenclatures normally associated with it, such as tokens, coins, cryptocurrency and virtual currency.
2. What is an Initial Coin Offering (ICO)?
The acronym ICO is used to designate an initial distribution offering of cryptoassets.
An ICO is a way of raising funds from the public through cryptoassets using blockchain technology. In this operation, the issuer, which may be a natural or a legal person, issues cryptoassets that are paid in legal tender or other cryptoasset currencies.
3. What are the risks of cryptoassets?
The risks of cryptoassets are, inter alia:
- Liquidity risk: Investors may not be able to sell the cryptoassets they have acquired.
- Risk of partial or total loss of the invested amount: the capital invested is not guaranteed, and the risks associated with the investment may not be mentioned in the documentation published by the issuer of the cryptoasset.
- Risk of insufficient information disclosure: investors' information may be missing, inaccurate, incomplete and unclear, requiring those who intend to acquire them, high technical knowledge to understand the characteristics of the cryptoassets.
- Fraud risk: there is an asymmetry between the information available to the issuer of the cryptoasset and the investor, and the inherent complexity of the cryptoassets securities makes it difficult for investors to understand their purpose.
No specific regulation for the protection of investors of cryptoassets that are not securities: It is necessary to analyse each case to determine whether or not the cryptoassets are covered by securities market regulations.
- Most of the agents marketing cryptoassets are not based in Portugal: conflict resolution may be outside the competence of national authorities, which may be unprotect national investors.
- Risk in the price formation of the cryptoasset: the price formation is not transparent in many cases and may not correspond to the real market value of that cryptoasset.
- High volatility: the value of a cryptoasset is prone to sudden and broad price variations.
- Money laundering risk: Due to the anonymity associated with the crypto assets, there may be a concealment of the origin of the invested funds.
- Risk of experimentation or innovation: Often, projects funded through ICOs are at an early stage of implementation or development, or the business models are still experimental.
Risk of losing the cryptoassets' access code: The loss of the access code may make it impossible to permanently move the cryptoassets investment.
4. How precautionary should an investor be before investing in cryptoassets?
If investors decide to purchase cryptoassets or financial instruments with direct exposure to cryptoassets, for example crypto CFDs, they should fully understand their characteristics and risks. Investors should not invest amounts whose losses cannot be borne and should take into account that the acquisition of cryptoassets, even though acquired from regulated entities in other activities, does not mitigate the risks described above.
5. Under what circumstances are the Initial Coin Offerings (ICOs) and cryptoassets subject to Portuguese law?
In the event that an ICO is addressed to investors resident in Portugal and the cryptoassets issued in ICO are securities within the meaning of the Securities Code, the relevant national and community legislation regarding public offerings of securities, will apply.
Cryptoassets that are qualified as securities or financial instruments that have been issued or are being traded in Portugal, are subject to a set of rules.
6. Do all cryptoassets qualify as securities?
Not all cryptoassets qualify as securities since their classification depends on a case-by-base analysis. The cryptoasset has to cumulatively validate several requirements defined by law in order to be considered a security.