How unregulated investments expose investors to risks

Global trends in the unregulated digital currencies demonstrate that the crypto-asset market is uncertain. FILE PHOTO | NMG

In a bid to diversify their investment portfolios or seek investment opportunities with high returns, Kenyans risk taking up investment opportunities that have the potential of exposing them to unmitigated risks. In pursuit of outsized returns some investors temporarily forgot the misery that befell investors in pyramid schemes which similarly promised returns that were clearly unsustainable.

To this day, investors who lost funds in those schemes are still hoping that they will get some form of compensation, which may be a challenge, considering the entities were not under the supervision of any regulator. The onset of technology, which by and large has made financial transactions more efficient among other positive attributes, has also come with exposure to unregulated investment opportunities offered mainly through online platforms.

While there are still discussions around the regulation of virtual/crypto and digital currencies in Kenya, Kenyans are quietly investing and not so quietly investing in other emerging areas such as Initial Coin Offerings (ICOs) and unregulated online foreign exchange trading.

Most of the entities offering such alternative investment opportunities may not be licensed which exposes investors to unmitigated risks.

While some of these investment platforms and activities have caught the attention of the Capital Markets Authority (CMA), and action is being taken to protect investors, there are potentially many more out there where Kenyans are potentially exposed. The CMA has therefore come out to caution investors participating in ICOs and unregulated online foreign exchange trading platforms.

To attract investors, most of the entities involved seem to promise outsized returns which may not be sustainable in the long run.

Global trends in the unregulated digital currencies demonstrate that the crypto-asset market is uncertain and has experienced accelerated boom and bust cycles which may expose investors to substantial losses.

At the global level, the International Organisation of Securities Commissions (IOSCO), the international body that brings together the world's securities regulators, has identified several risks associated with ICOs.

These include; heightened potential for fraud as they are mainly internet-based; cross-border distribution risks – recovery of investors’ funds in the event of a collapse if ICO is operating outside the investor’s jurisdiction; information asymmetry – retail investors may not be able to understand the risks, costs and expected returns arising from the investment; and liquidity risks - insufficient liquidity to support reliable trading and market-making activities.

There are also unmitigated risks in online foreign exchange trading through platforms of unlicensed entities, where investors risk losing their investments and may not be protected by the law.

While the Authority is protecting investors in the capital market, investors are advised to avoid participating in investment opportunities offered by unregulated entities, as there may be no recourse in the event of a collapse and/or loss of their investments. Kenyans are reminded that an informed investor is the best protected investor.

Anthony Mwangi, head of corporate communications, Capital Markets Authority.

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