Digital Payment Token (DPT) investments, more commonly known as cryptocurrency, are constantly evolving. While they present opportunities, they also come with complex challenges. As the DPT ecosystem grows, it becomes increasingly important for retail investors to understand the nuances, risks, and responsibilities involved.
The Monetary Authority of Singapore (MAS) regulates DPT service providers and has issued guidelines to help individual retail customers better understand the risks of trading DPTs. This article outlines some of the most important topics to keep in mind before using DPT trading platforms or engaging in DPT investments.
It covers the role of DPT trading platforms, common risks such as price volatility and technology issues, and the importance of diversification. Whether you are familiar with DPTs or just getting started, this guide is designed to help every investor understand how DPT investments work and what to watch out for.
DPT Trading Platforms: Role and Scope of Their Business
DPT trading platforms serve as trading hubs within the DPT ecosystem, with their core business focused on facilitating the buying, selling, and trading of DPTs. Some also offer custody services to store DPTs securely. These platforms do not provide investment advice.
Bitstamp by Robinhood enables customers to trade, withdraw, and hold DPTs in custody. However, it does not issue any of the DPTs available for trading on the platform. Customers maintain full legal ownership of their DPTs, while Bitstamp by Robinhood acts as the custodian responsible for safekeeping.
Before trading, customers are responsible for evaluating the risks and characteristics of each DPT and should always conduct their own research.
Customer Rights and Responsibilities
When using a DPT trading platform, customers should understand their fundamental rights and responsibilities. This includes knowing the difference between legal and beneficial ownership of DPTs.
Legal ownership means holding and owning the DPT within the platform's custody, while beneficial ownership means that the customer receives the gains or losses from the price movements in the DPTs, but the DPTs are held by the platform on the customer’s behalf. However, both forms of ownership carry associated risks.
Potential Losses
DPT investments present a number of risks. Firstly, it's essential to recognize that the value of a DPT can drop significantly or even fall to zero. And secondly, markets are volatile, and prices can move quickly. In short, DPT investments can be unpredictable and carry substantial financial risks. For this reason, MAS considers DPTs to be high-risk investments.
Complexity of DPT Investments
DPTs vary in structure and purpose. This can make them difficult to understand, especially for less experienced investors. Before investing, it is important to review educational resources such as those available in the Bitstamp by Robinhood Learn Center.
Performance Volatility
One defining feature of DPT markets is their relentless 24/7 operation, which can lead to rapid and unpredictable changes in DPT values at any time. This volatility also applies to stablecoins, which are designed to be pegged to fiat currencies or commodities. While they aim for price stability, stablecoins can still experience value fluctuations and, in some cases, may lose their value entirely. They should not be assumed to function as guaranteed stores of value.
Technological/Operational Risks
Using DPT services involves operational and cybersecurity risks. These include system outages, technical failures, and cyberattacks, all of which may affect access to DPTs or delay trading and withdrawals.
There is also a risk of fraud and scams that can result in the complete loss of assets. Customers who use private wallets must manage their private keys securely. Loss or mishandling of these keys can result in permanent loss of assets, and recovery may be difficult or impossible.
Customers are responsible for ensuring that no one else has access to their private keys or login credentials. Caution is also advised when clicking on links, as some may lead to scam websites. For DPTs held on the Bitstamp by Robinhood trading platform, robust security measures are in place to protect customer DPTs.
And when it comes to self-custody of DPT in private wallets, there is always a risk of losing access to assets if private keys are lost, with recovery often being impossible.
Business Insolvency Risks
Bitstamp by Robinhood is a licensed DPT service provider regulated by the Monetary Authority of Singapore (MAS). As part of its regulatory obligations, it is required to safeguard customers’ DPT and fiat assets following MAS safeguarding measures.
In the unlikely event that Bitstamp by Robinhood becomes insolvent or faces financial difficulties, customers’ access to their DPTs and fiat currencies may be temporarily affected. Insolvency can lead to delays in retrieving assets from custody.
All customer assets held with Bitstamp by Robinhood are fully maintained in custody with a reputable custodian and are available for withdrawal. However, in the event of insolvency, there may still be delays in processing withdrawals.
Liquidity Concerns
Liquidity refers to how easily an asset can be converted into fiat currency or another DPT. In illiquid markets, where there are few buyers or sellers, it may be difficult to sell or convert DPTs quickly. This can disrupt trading strategies or prevent access to funds. In extreme cases, DPTs may become temporarily unsellable, and their value may fall during that period.
Regulated Status of DPT Trading Platforms
Bitstamp Asia Pte Ltd is licensed as a Major Payment Institution by the Monetary Authority of Singapore (MAS) under the Payment Services Act to provide Digital Payment Token and Cross Border Money Transfer services in Singapore.
MAS has set out certain guidelines that require licensed DPT trading platforms to conduct a Risk Awareness Assessment for individual retail customers. This helps confirm that customers are aware of the risks involved in DPT trading and have sufficient understanding before using these services.
Business Conduct Risk
MAS-licensed DPT trading platforms are expected to disclose the nature of their business activities and identify potential conflicts of interest. This allows customers to make informed decisions before using the services provided by the trading platform. Platforms are also expected to implement appropriate measures and controls to mitigate these conflicts of interest.
Protection Services
Bitstamp by Robinhood’s services are not covered under the scope of the Singapore Deposit Insurance Scheme. There is no insurance protection for losses arising from poor investment performance or market downturns in the DPT sector.
Comparison With Mainstream Investments
Investing in and holding DPTs is fundamentally different from mainstream investments, such as listed or exchange-traded securities. DPTs are typically more volatile and can experience sharp value swings. Unlike government-backed currencies (like GBP, USD, EUR, etc.), DPTs lack official backing and are not supported by central banks during times of financial crisis. Additionally, DPTs are not typically stored in regulated, centralized securities depositories, and not every DPT market data provider is subject to regulation. DPT trading platforms operate under different trading regulations compared to stock exchanges, and DPTs are not cleared and settled through regulated clearinghouses but through decentralized blockchain networks, where transactions are grouped into blocks, validated by network nodes, and added to the blockchain, providing security, immutability, and rapid settlement.
The Benefits of Portfolio Diversification
Diversification is a powerful strategy in the world of investments, including DPTs. Spreading investments across different asset types can help manage investment risk. Individual retail investors are strongly advised not to allocate more than 10 percent of their net assets to high-risk products like DPTs.
Use Caution When Navigating the DPT Landscape
In conclusion, DPT investments carry high risks and are not suitable for everyone. We hope this article has helped highlight some of the key principles to keep in mind. We encourage all customers to stay informed and review trusted educational resources like our Learn Center. Always take time to assess the risks, think carefully before investing, and seek expert advice when needed.
This content is for informal and educational purposes only and should not be considered as legal, financial, or investment advice.