In a trading platform bankruptcy, you could lose some or all of the cryptoassets you held with that platform.

ICO s

Over the past year, hundreds of businesses have raised capital by selling digital tokens in an ICO. Over one in ten Ontario adults have been approached or sought information about an ICO, though only 1.5 per cent have actually participated in an ICO.



Typically, a business launching an ICO will publish a “white paper” that says how much money they want to raise, how the money will be used, and how long the ICO will go on for. Typically, the management team will make themselves available to answer your questions via social media.



While ICOs may at first glance seem similar to an initial public offering (IPO) launched by a company on a stock exchange, ICOs and IPOs are very different. Unlike shares sold in an IPO, digital tokens typically do not represent an equity interest in the business. This means token purchasers typically do not get a right to own part of the business, the right to vote for the business’s board of directors, or the right to receive dividend payments from the business.

A recent study found signs of widespread fraud in this sector: of 1,450 ICOs reviewed for the study, 271 were found to display red flags of fraud, including plagiarized investor documents, promises of guaranteed returns and missing or fake executive teams. And as experience has shown, even legitimate ICOs have a high risk of failure.

Most ICOs are subject to securities regulation.

Many businesses offering digital tokens may not be complying with applicable requirements that exist to protect investors. For example, the white paper published by a business may not include the level or quality of information required to be provided to prospective investors. Securities laws generally prescribe that a business provide prospective investors with a prospectus or an offering memorandum. These documents include key information about the business, its management, operations, and business risks, as well as the rights investors will have if they invest in the business. This information helps prospective purchasers make an informed investment decision. Those trying to sell digital tokens to the public may also be required to register as investment dealers. These requirements apply regardless of where a business is located—if the business is selling digital tokens to Ontario investors, it must comply with Ontario securities law.

Checklist: Do your research

Finding a legitimate company with a smart business idea that understands and complies with the regulations that protect you as an investor means doing your research. Before buying a digital token:

Make sure you understand what the token does, what it gets you, and whether the business model makes sense.

what the token does, what it gets you, and whether the business model makes sense. Run a web search to see if you can find the location of the business and the people on the business’s team—fraudsters may use stock photos to construct fake management teams. Think about whether the management team has relevant experience, and check to see if there’s a way you can contact them directly. If you can’t contact the team or they can’t answer your questions, beware. Remember that it may be more difficult to enforce your rights against a business located outside Canada.

to see if you can find the location of the business and the people on the business’s team—fraudsters may use stock photos to construct fake management teams. Think about whether the management team has relevant experience, and check to see if there’s a way you can contact them directly. If you can’t contact the team or they can’t answer your questions, beware. Remember that it may be more difficult to enforce your rights against a business located outside Canada. Use the OSC’s Check Before You Invest site to find out whether they’re authorized to sell investments in Ontario or have previously been flagged as posing a risk to investors.

In short, be skeptical. If something looks too good to be true, it probably is. Beware of companies promising guaranteed increases in value or warning that you should buy now to avoid “missing out”—these are both red flags of fraud.



Message boards, social media, and blogs may help you learn more about a particular digital token, but there’s no guarantee that posts on these channels are impartial. People linked to a business offering digital tokens may post positive information on these forums to try and generate interest in their tokens. Many businesses create “bounty programs” that reward people for posting positive information to increase hype. Keep in mind that posts may also be outdated or inaccurate by the time you come upon them.





To show investors what a fraudulent ICO might look like, the OSC launched TBAcoin.ca, a mock ICO that displays many of the red flags associated with fraud.

Cryptoasset kiosks

Some companies offer digital coins for sale at a physical kiosk, often branded as an “ATM,” which lets you insert cash in exchange for digital coins. If you already have a digital wallet, the kiosk can send your digital coins to that wallet. If you don’t have a wallet, the kiosk often can assign you new public and private keys and print them off for you on a slip of paper (so that you can add them to a digital wallet later).



These kiosks are not the same as ATMs used to deposit and withdraw money. Kiosks may be unreliable, may not have enough cash to meet withdrawal requests, or may not be able to complete deposits and withdrawals in a timely way. Before purchasing digital coins at a kiosk, make sure you understand the fees you are being charged, as these fees can be substantial. Keep any private keys you receive secure, and don’t share them with anyone.

Mining

It’s possible to earn cryptoassets by participating in cryptoasset mining—operating computer systems that validate cryptoasset transactions and help add them to a blockchain. Currently, most cryptoasset transactions are added to a blockchain through “proof of work” mining, which means that different miners race to solve complex math problems that need to be completed before a set of transactions can be added to a blockchain.

Proof of work mining is expensive

—you need sophisticated computer hardware to stand a chance at being the first to add transactions to a blockchain, and operating that hardware consumes a lot of electricity.



Some cryptoassets' networks add transactions to a blockchain through a “proof of stake” system, in which a user is chosen to process a particular set of cryptoasset transactions based on the amount of cryptoassets that user holds.

For example, a user who holds 30 per cent of the total supply of a given cryptoasset will have a 30 per cent chance of being allocated the next set of transactions, while a user who holds only 10 per cent of that supply will have a 10 per cent chance of being selected.

Because mining in a proof of stake system tends to cost less than mining in a proof of work system, the transaction fees and other rewards paid to these miners tend to be lower.