NY Attorney General warns of risks after crypto market crash

Rick Steves

“Too often, cryptocurrency investments create more pain than gain for investors.”

New York Attorney General Letitia James has warned NY residents of the risks of investing in cryptocurrencies, after last month’s crypto market plunge, wiping away hundreds of billions in investments.

Besides the extreme market volatility that has been a feature of the digital asset space, the collapse of Terra (LUNA) and UST have put a dent in the general confidence in the ecosystem.

The NYAG office has recently pulled the plug on Tether over lack of transparency and false statements on its USD backing and issued an $18.5 million fine.

“Over and over again, investors are losing billions because of risky cryptocurrency investments,” said Attorney General James. “Even well-known virtual currencies from reputable trading platforms can still crash and investors can lose billions in the blink of an eye. Too often, cryptocurrency investments create more pain than gain for investors. I urge New Yorkers to be cautious before putting their hard-earned money in risky cryptocurrency investments that can yield more anxiety than fortune.”

NY Attorney General offers guidance on crypto risks

Due to the extreme volatile nature of the digital asset market, which is also ridden with hacking, fraud and theft, NYAG Letitia James provided guidance to investors in virtual assets, who “should beware of the many significant risks of investing in these products including:

  • Highly Speculative and Unpredictable Value: Virtual currencies are easy to create and spread in the market quickly. Their underlying value is highly subjective and unpredictable. As a result, prices can swing wildly and crash without warning and without regard to any changes in the real economy. At times, price fluctuations are driven by market hype on various social media platforms.
  • Difficulty Cashing Out Investments: There is no guarantee that you will be able to liquidate your investments when you want — such as when the crypto markets begin to crash. During times of crisis, trading platforms may halt trading or purport to experience technical difficulties, preventing you from accessing your assets.
  • Higher Transaction Costs: Some trading platforms charge fees on transactions such as transferring funds and withdrawing money. These fees can vary depending on the size of the transaction and overall trading volume. Therefore, it may also cost you more to access your assets when you need them the most.
  • Unstable “Stablecoins”: Despite their misleading name, there is no guarantee that your stablecoin investment is protected from decreasing value. The nature and quality of the assets backing stablecoins — if there are any assets backing the stablecoin — can vary greatly and along with that so can the risks associated with holding such coins.
  • Hidden Trading Costs: Value in cryptocurrencies and other virtual assets may be propped up by automated trading, or bots, that are, for example, programmed to spot when another trader is trying to make a purchase and then buy ahead of the trade. This practice can push up the price and cost you more to purchase the same virtual asset.
  • Conflicts of Interest: Many operators of virtual currency trading platforms are themselves heavily invested in virtual currencies, and trade on their own platforms without oversight. The financial interests of these operators may conflict with your interests. There have also been recent reports of large investors receiving favorable treatment, such as private cash-outs away from the market.
  • Limited Oversight: There are no federally regulated exchanges, like the New York Stock Exchange or Nasdaq, for virtual currencies. Virtual currency trading platforms operate from various places around the world, many of which are not easily accessible to American law enforcement. Many platforms are subject to little or no oversight. If you are the victim of fraud on one of these exchanges, you will likely have no recourse in the United States. Further, many issuers of virtual currencies are not regulated and therefore are not subject to net capital requirements or examinations. Thus, people who lose money trading a certain virtual currency may have no recourse with respect to the issue of the currency.

Attorney General James has recently issued a taxpayer notice to virtual currency investors and their tax advisors to accurately declare and pay taxes on their virtual investments.

In October 2021, Attorney General James directed unregistered crypto lending platforms to cease operations for not fulfilling their legal obligations.

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