The following information will be made available to retail customers before attempting the Risk Awareness Assessment Questionnaire (“RAAQ”), as well as prior to subsequent RAAQ re-assessments attempts.
[Education Information] Potential risk associated with Digital Payment Tokens (“DPT”)
It is crucial to understand the risks involved, including price volatility, liquidity issues, cybersecurity threats, and the risks associated with using custodial services, when dealing with Digital Payment Tokens (DPTs). Always conduct thorough due diligence and be aware of the various potential impacts. By understanding these risks, you can make more informed decisions and mitigate some of these risks.
The following information seeks to highlight the risk of DPT services to you, and not trivialise them.
1. Market Volatility Risk
DPTs are highly volatile and can experience sharp fluctuations in value, including the possibility of a complete loss. Several factors influence these price fluctuations:
Supply and Demand Dynamics: The balance between buy and sell orders directly impacts the price of DPTs.
Social Media Sentiment: Public perception or rumors on platforms like Twitter or Reddit can drive significant price changes.
News and Regulatory Announcements: Market-moving news such as regulatory changes or technological advancements can greatly impact the value of DPTs.
Bitcoin and Ethereum typically experience moderate to substantial price changes, while other digital payment tokens can exhibit even greater volatility.
2. Risks Associated with Liquidity
Liquidity refers to the ease with which you can buy or sell a DPT without causing significant price movement. Liquidity is affected by:
Market Illiquidity: There may be a lack of buyers or sellers for specific DPTs, especially in periods of high volatility.
System Outages: Exchanges may experience technical issues or cyber-attacks that prevent you from selling or accessing your DPTs.
Blockchain Network Issues: Network congestion or blockchain outages can prevent transactions from being processed.
Factors influencing liquidity:
Order Book Depth: A deep order book (large buy and sell orders close to the current price) ensures smoother and faster transactions.
Market Conditions: Low trading volume or market crashes can reduce liquidity, making it harder to execute trades.
Exchange Failures: System downtimes or technical failures can impact the ability to trade.
3. Custody Risks
Custodial Solutions: Some customers opt for DPT custodial services , where a DPT service provider holds their DPTs (this means that DPTSP holds the legal title to the DPTs held but the DPTs held still belong to the customer). While this can provide convenience, it exposes the investor to risks if the provider is hacked, experiences an operational failure, or faces insolvency.
If the DPTSP has not sufficiently implemented risk management controls to secure the storage and transmission of the assets, which include a compensation framework on losses covered, or if the DTPSP loses the private keys to its wallets or its assets are stolen.
4. Risks from Fraud or Theft
DPTs can be susceptible to theft, fraud, or hacking. The risks include:
Loss of Private Keys: If you lose the private keys to your DPTs, you lose access to your assets. Unlike traditional financial assets, there is no safety net for this type of loss.
Cybersecurity Risks: Malicious actors may target exchanges or wallets to steal DPTs. This includes blockchain hacking or vulnerability exploits in the smart contracts that the DPTSP uses.
Fraudulent Schemes: "Pump and Dump" and other manipulative trading practices may inflate the price of a token artificially, only to crash it once the manipulator sells off their assets.
5. Conflicts of Interest and Business Conduct Risks
There are various business conduct risks when dealing with DPT Service Providers (DPTSPs):
Pump and Dump Schemes: Token issuers may manipulate their token prices by artificially inflating their value before abandoning the project.
Exchanges Engaging in Front Running: Some exchanges may execute their trades ahead of customer orders to take advantage of expected price movements.
Wash Trading: Exchanges or token issuers may trade between accounts they control to create the illusion of liquidity or higher prices.
Other conflicts of interest can arise when a DPT service provider engages in multiple business activities, such as acting as a market operator while also conducting over-the-counter (OTC) trading from its own account on the same market it operates.
6. Operational and Insolvency Risks
Even when using regulated DPT service providers, risks related to operational failures and insolvency still exist:
Cyber-Attacks: If a DPTSP is targeted by hackers, users may lose access to their assets.
Operational Failures: Service outages, technical failures, or loss of private keys by the DPTSP can result in the loss of assets.
Insolvency: There is always the risk that the DPTSP may go bankrupt, which could lead to a complete loss of DPTs held with the provider.
7. Regulatory Risks
When engaging DPTSPs who are not regulated, you face increased risk due to:
Lack of Consumer Protection: Unregulated platforms may not offer sufficient safeguards, leaving you vulnerable to theft or fraud.
Financial Crime Risks: Unregulated DPTSPs may not comply with anti-money laundering (AML) or other security standards, increasing the risk of financial crimes.
Regulated DPTSPs, on the other hand, are required to adhere to the Payment Services Act, ensuring better consumer protection and amongst other requirements, including the proper DPT listing governance. To verify the licensing status of DPTSPs, please refer to the MAS Directory and the Investor Alert List.
8. Common Vulnerabilities and How to Protect Yourself
Several vulnerabilities can expose you to third-party theft:
Phishing: Be cautious of websites or emails requesting your private key, wallet login, or other sensitive information.
Clickjacking: Avoid clicking on suspicious links that could redirect you to fraudulent websites designed to steal your data.
Malware: Ensure your devices are secure and free of malware that could compromise your wallet's security.
Weak Wallet Security: Always use a secure password, enable two-factor authentication, and consider hardware wallets for sensitive holdings.
Authorization Risks: Avoid approving transactions on your self-custody wallet that you do not fully understand or cannot verify, as this could expose your assets to potential theft or loss.