Crypto Digest #1
Caveat Emptor
This is the first of our Crypto Digest blogs brought to you by Mezzle Law’s resident crypto lawyers. Subscribe to stay up to date with our short and informative blogs on all things law and crypto (lex cryptographia).
With interest in crypto-coins and NFTs on the rise, and more and more regular members of the public buying into digital assets, we briefly explore the risks involved in this unregulated, and high risk, fin-tech area.
Caveat emptor is a well-known legal doctrine, which literally translates to ‘buyer beware’. The value in digital assets is gained in the same way as we apportion value in physical assets, such as gold, oil, and diamonds. It’s based on a finite supply, increased demand, and the ability to trade in the asset. Just as you wouldn’t enter those markets blindly, you should always go into digital asset investment with your eyes wide open. Conduct your own research into the specific crypto currency or NFT, which you are intending on purchasing. Speak to other individuals in the same field who may already have a substantial crypto-asset portfolio.
Blockchain technology is revolutionary, and it will continue to thrive, but we are still in the experimental stages and this is why there is a lot of uncertainty in this sector, which also drives the wild fluctuations in the value of digital assets. Whilst blockchains are immutable, and are largely seen to be ‘un-hackable’, there have been a number of recent high profile hacks, and so it would be prudent for investors to fully understand the risks involved before delving into digital asset investment.
Bored Ape Yacht Club (BAYC) have developed some of the most sought after NFTs. Their Instagram account was recently hacked and the hackers are known to have stolen around $3million worth of assets. This was a highly sophisticated hack and investigations are ongoing into how this occurred.
Last month, hackers stole around $600million from a blockchain network gaming platform, Axie Infinity, which is said to be the biggest crypto heist to date.
OpenSea were also subject to a phishing scam earlier this year, and a number of tokens were stolen as a result.
These are just a few recent examples. Until global regulation is enforced, unfortunately, sophisticated hacks like this will continue to occur and we will likely see an increase until there is consistent global regulation. This shouldn’t put investors off, because blockchain has unfathomable potential, but you should always be aware of the risks involved, particularly as there may not be a way to recover any losses. Hackers, like regular criminals, will exploit any vulnerabilities, either in you as an individual, or in the technology.
Some jurisdictions have been quick to act. Dubai’s Regulation of Virtual Assets (DVAL) came into force on 11 March 2022. The law regulates virtual assets and applies throughout Dubai, including free zones and special development zones. Whilst the US does not regard cryptocurrency as legal tender, and there hasn’t yet been a consistent approach by States, they are developing a federal framework. Malta and Gibraltar are largely seen to be a global leaders in crypto regulation. Singapore, Australia, Japan and the UK have also developed their own framework and legislation. China has gone with more of a nuclear approach, and it has banned the use of cryptocurrency, mining, and crypto exchanges, limiting all crypto activities for now.
As with the rise of any risky activity, there will be a rise in insurance products available to insure the risk. Cyber insurance policies have been around for a while , but some underwriters have also incorporated crypto currencies, smart contracts and wallets into their policies. If you are thinking of investing, or already hold crypto assets, then you should seriously consider whether you want to take out insurance. A Lloyds of London syndicate have backed cryptocurrency insurance for Coincover, which provides insurance against theft or malicious hacks and that would be advisable if your assets are substantial.
In summary:-
- Do your own research. Don’t just buy something because everyone else is, without doing your own due diligence first.
- Keep your details private and secure. Update your security settings.
- Look at Crypto insurance to determine whether there’s a suitable policy.
- Spread your risk (across different exchanges and assets).
- If in doubt, sit it out (unless you thrive on high risk investments!).
- And finally, the golden rule - Only invest what you can afford to lose!
Whether you’re a company launching a new cryptocurrency, NFT, or metaverse, or if you’re an individual who wants dispute resolution advice in the crypto space, then speak to our specialists to see how Mezzle Law can help you.
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