askST: Is it safe to invest in cryptocurrencies like bitcoin? And what are NFTs?

SINGAPORE – Digital assets such as cryptocurrencies and non-fungible tokens (NFTs) have been making headlines.

Bitcoin prices have skyrocketed in the past year. On the other hand, investors using online cryptocurrency trading platform Torque, run by a Singaporean businessman, are reporting millions of dollars lost in cryptocurrencies.

An investor in Singapore also spent a record US$69 million (S$93 million) worth of cryptocurrency on an NFT for a digital collage at a Christie’s auction on March 11.

The Straits Times takes a closer look at these digital assets:

Q: What are cryptocurrencies?

A: They are digital assets that are not issued by any government and are not backed by any asset or issuer. They are secured by cryptography so they cannot be forged.

Cryptocurrencies use blockchain technology, which involves a public digital ledger distributed across many computers connected in an online network.

All the computers have a copy of the ledger, so any transaction is recorded and added to this shared list of transactions.

Anybody in the network can become a “miner” and use computing resources to solve complex mathematical problems to verify cryptocurrency transactions.

So, no central authority is required to verify the transactions.

Miners are rewarded for their work with some digital tokens.

Q: Can cryptocurrencies be used for payment?

A: People can buy cryptocurrencies using cash at exchanges and specific ATMs. The tokens can also be mined by verifying transactions.

The digital assets have been used to pay for goods and services, while some people have bought them as an investment product.

It is not clear how many businesses here accept cryptocurrency payments. But Ms Zann Kwan, a board member of the Association of Cryptocurrency Enterprises and Start-ups (Access), Singapore, said that they include professional services companies like accounting firms, architectural firms and even online companies selling baby products.

Cryptocurrencies can be transferred anonymously between buyers and sellers.

Since payments can be made directly, transactions can be faster and costs can be lowered as the middlemen facilitating the payments are cut out.

Bitcoin represents about 60 per cent of the total capitalisation of cryptocurrencies in March, said Europe’s largest asset manager Amundi.

The bitcoin network was established in 2009, in the wake of the global financial crisis. It has a limited supply, which is fixed at 21 million units. This limit is expected to be reached in the year 2140.

Q: Are there cryptocurrency ATMs in Singapore?

A: Cryptocurrencies can be bought and sometimes sold for cash at certain ATMs in Singapore, for a fee. The first bitcoin ATM was set up here in 2014.

According to the Coin ATM Radar website, there are eight bitcoin ATMs here, with one each located in Lucky Plaza, Plaza Singapura, Capitol Piazza, Funan mall, Paya Lebar Quarter mall and the Bitcoin Exchange Singapore Office in Upper Cross Street. The Arcade in Raffles Place has two bitcoin ATMs.

Some ATMs here also support other types of cryptocurrencies such as for ether, litecoin and tether.

The ATMs have some safeguards, such as requiring users to verify their identities. They also set limits on the amount that can be transacted.

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Q: What has been fuelling prices of cryptocurrencies?

A: The price of bitcoin has jumped 700 per cent in the past year. In the first two months of this year, it had already risen by 70 per cent, hitting a record US$61,742 on March 13.

The meteoric rise has been fuelled by institutional investors and investment funds that view bitcoin as an alternative portfolio diversifier and an asset to store value. But some experts have argued against such functions for bitcoin.

Other factors include major companies, such as electric carmaker Tesla, increasingly adopting the token, as well as interest from retail investors in general.

Investments in digital tokens have also grown. In 2017, US$2.25 million worth of cryptocurrencies were invested in Singapore but the figure for 2020 was US$67.6 million, according to data from market intelligence platform Tracxn.

Globally, the figure in 2017 was US$727 million and in 2020, it was US$1.53 billion.

Q: Are cryptocurrencies regulated in Singapore?

A: Cryptocurrencies are not regulated by the Monetary Authority of Singapore (MAS) as they are not considered legal tender.

But in late January 2020, the Payment Services Act, which regulates cryptocurrency service providers, among other things, came into force.

But these service providers are regulated primarily for money laundering and terrorism financing risks, given the anonymity, speed and cross-border nature of transactions that cryptocurrencies facilitate, said MAS.

Digital token intermediaries that buy, sell or facilitate the exchange of the tokens must identify and verify their customers, monitor transactions, keep records and report suspicious transactions.

Some finance experts think bitcoin is overvalued and expect the bitcoin bubble to burst.

Amundi warned clients last week that Group of 7 governments are determined to regulate cryptocurrencies and this could lead to a potentially “brutal” adjustment in their prices.

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In August last year, Access rolled out a set of guidelines to help digital asset players strengthen regulatory compliance.

Ms Kwan said the practices outlined include performing greater due diligence on customers, such as those whose transactions exceed a certain limit.

Cryptocurrency service providers should also monitor the addresses they transact with to ensure that the digital tokens they receive are not from illegal sources.

Q: How many cryptocurrency offences have been committed since rules kicked in?

A: When contacted regarding cryptocurrency offences under the Payment Services Act, the police said that, so far, there is one convicted case – a 24-year-old Singaporean woman who was found guilty on Jan 28 and sentenced to four weeks’ jail.

Investigations by the Commercial Affairs Department found that on Feb 27 and 28 last year, the woman provided a digital payment token service by receiving at least 13 fraudulent fund transfers amounting to $3,350 in her bank account, used the funds to buy bitcoin and transferred her purchase to multiple bitcoin wallets.

She does not have a licence to provide any type of payment services in Singapore and is not exempted under the Act.

The police warned job seekers to be wary of job advertisements that promise the convenience of working from home with an unbelievably high salary for relatively simple job responsibilities.

“Legitimate businesses will also not require the job seekers to use their own bank accounts to receive monies on the businesses’ behalf. These acts are common ruses used by scammers to have individuals carry out illicit payment transfers on their behalf,” said the police.

Q: What are some concerns with cryptocurrencies?

A: Many companies and finance experts do not think cryptocurrencies like bitcoin will be adopted widely soon partly because of their high price volatility, which could translate to not just large potential gains but also huge losses very quickly.

There are also issues with storing them securely since there have been high-profile hacks of and thefts from cryptocurrency exchanges, as well as challenges in accounting for the tokens.

Safety concerns have prompted some people to store cryptocurrencies in their own personal devices, like secure thumbdrives and harddrives, that are cut off from the Internet to prevent hacking.

Even then, there is still the issue of losing passwords to access the digital assets on the devices, which has already resulted in some people potentially losing access to hundreds of millions of dollars’ worth of bitcoins.

Ms Kwan said that if passwords to keep the tokens safe are lost, there is no entity that can help to retrieve the cryptocurrencies.

The digital tokens have a very negative impact on the environment, too, because of how energy intensive they can be.

For example, it is estimated that mining bitcoins consumes more electricity than the entire Belgian economy, said Amundi.

Cryptocurrencies have also been linked to illegal online activity – such as money laundering and terrorism financing – as transactions involving them are hard to trace.

Another concern for the authorities is the risk of financial instability with cryptocurrencies.

Amundi noted that cryptocurrencies are reminiscent of the “free banking” experience in the United States in the 19th century in which banks were allowed to issue their own currencies.

The coexistence of several currencies was a source of great financial instability until the creation of the US Federal Reserve in 1913.

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Q: Is it safe to invest in cryptocurrencies?

A: Singapore’s Payment Services Act does not specifically offer consumer protection when it comes to cryptocurrencies, but MAS has issued advisories to warn the public of the risks of investing in them.

This is especially so for consumers who may not be familiar with the underlying technology or how the investment schemes are structured.

Cryptocurrency service providers licensed under the Act have to also show warnings to consumers to alert them to the risks of trading in cryptocurrencies.

“Members of the public who lose money from investing in (cryptocurrencies) cannot rely on any protection afforded under legislation administered by MAS,” the authority has said.

Ms Kwan said that investors need to understand that cryptocurrency prices could fluctuate substantially very quickly.

For example, the sharp drop in bitcoin prices last Thursday (March 25) resulted in about US$100 billion lost in the token’s market capitalisation in just 24 hours.

On bitcoin, the financial regulator previously said that “if bitcoin ceases to operate, there may not be an identifiable party responsible for refunding (consumers their) monies or… seek recourse”.

Investors should carefully assess whether an investment in cryptocurrencies is suitable for their investment objectives and risk appetite, said the regulator.

They should carefully consider claims being made about the products offered.

People who suspect an investment involving cryptocurrencies could be fraudulent, or misused for other unlawful activities, should report such cases to the police.

Some legislative changes were recently made that can improve safeguards for consumers.

Changes to the Act were passed in January to let MAS impose measures on cryptocurrency service providers to ensure better consumer protection, when needed.

For instance, MAS could require a cryptocurrency service provider to segregate customer assets from its own assets, which will help safeguard customer money from loss in the event of insolvency.

The regulator aims for the changes to take effect in the second half of the year.

Q: What are non-fungible tokens (NFTs)?

A: An NFT can be viewed as a collectible digital asset that acts as a unique digital certificate of authenticity and ownership for a physical or virtual item.

So, even though an item might be reproduced many times, there is usually only one unique NFT for the item and whoever owns the NFT is the sole unique owner of the item the token represents.

“While anyone can view the NFTs, the buyer has the status of being the official owner – a kind of digital bragging rights,” noted Reuters.

An exception is when the person who created the NFT allows more than one NFT for the same item to exist, similar to how there can be a run of 100 special edition pairs of sneakers instead of just one pair.

NFTs can be created for a physical or digital painting, video, animation, piece of music or text, a tweet, a collectible like sports memorabilia and more.

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One example is NBA Top Shot, a collection of unique, historical basketball highlights each recorded in a short video clip. They can be seen as digital collectible sports trading cards with a video element.

NFTs can be bought with real money or the ether cryptocurrency, and the transactions are recorded using blockchain tech – in other words, in a public digital ledger.

This means all computers in a network have a copy of the digital ledger for NFTs, which records transaction details like when an NFT was sold, who sold the token and who owns it now. It also means such information cannot be forged.

Buying an NFT for digital art can entail getting the token – it exists as computer code – which can contain an online link to the file of the artwork that the buyer can access to view or save the digital art.

Trading in NFTs has jumped sharply this year, even though they have been traded since around 2017. Reuters said that monthly sales on NFT marketplace OpenSea hit US$95.2 million in February, up from US$8 million in January.

But there are concerns with NFTs, such as whether the person who creates an NFT for an object, like an artwork, for sale online is really the original creator of the art.

Additional reporting by Prisca Ang

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