Are Crypto-based Securities Investments Safe For Retail Investors?

Cryptocurrency and digital asset investments have gained widespread attention, with many firms promoting them as exciting opportunities for retail investors. However, these investments often come with significant risks and regulatory uncertainty. Unlike traditional securities such as stocks and bonds, crypto-based securities do not always have the same regulatory oversight, leaving investors vulnerable to fraud and financial loss.

If a financial advisor recommended crypto-related securities, such as private placement funds or digital asset investments, and you suffered substantial losses, you may have legal recourse. A New York crypto investment fraud law firm like Malecki Law can review your holdings and determine if misconduct occurred.

One of the most pressing issues in the digital asset space is regulatory oversight. The question of whether the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), or another governmental agency has jurisdiction over digital assets remains unresolved. The SEC has taken an increasingly aggressive stance on enforcement, bringing nearly 130 crypto-related cases since 2013, with around 30 enforcement actions in 2022 alone.

Many of these actions involve allegations of fraud in the offer or sale of digital asset securities. If you suspect fraudulent activity in connection with a crypto-based investment, you should consult with an experienced crypto investment fraud attorney in New York, like the lawyers at Malecki Law.

Many firms sell crypto-related funds rather than directly investing in digital assets. While this may seem like a safer approach, these investments present their own risks, including liquidity concerns and exposure to extreme volatility.

For example, some crypto-related investments are structured as limited partnerships, requiring investors to make capital commitments over a specified period. Investors may receive unexpected capital calls, requiring additional deposits to fulfill their financial commitment. Because these investments are not publicly traded, funds are often "locked up" for extended periods. This lack of liquidity makes such investments unsuitable for investors who need regular access to their funds, have a low-risk tolerance, or prefer short-term investment horizons.

If you are unable to access your funds due to a crypto-based investment, it is essential to seek legal advice. A New York crypto investment fraud attorney at Malecki Law can analyze your investment agreements and assess whether you have grounds for a claim.

Due to the speculative nature of digital assets, investment firms must properly disclose and explain all associated risks to their clients. Registered financial firms are also required to comply with regulatory standards, such as the SEC’s Regulation Best Interest (Reg BI) and FINRA’s Know Your Customer (KYC) rule. These rules require brokers and investment advisors to understand their clients’ financial situations, risk tolerance, liquidity needs, and investment objectives before making recommendations.

It is important to understand whether your financial professional is a stockbroker or an investment adviser representative (IAR). Unlike brokers, IARs are held to a fiduciary duty standard under the Investment Advisers Act of 1940 (IAA). This means they must act in their clients' best interests, prioritizing investor needs over their own financial gain. The fiduciary duty standard includes:

• Duty of Care – Ensuring investment recommendations are based on thorough research and suitable for the client.
• Duty of Loyalty – Avoiding conflicts of interest and disclosing any potential biases.

If your investment adviser placed their own financial interests ahead of yours when recommending a crypto-based investment, they may have breached their fiduciary duty.

An unsuitable recommendation can have devastating financial consequences. Consider this example: A 70-year-old investor with a conservative risk tolerance, a need for capital preservation, and a desire for liquidity should not be advised to invest in an illiquid crypto-based limited partnership. Such a recommendation would likely violate FINRA’s suitability rules and the SEC’s Reg BI standard.

If you have suffered losses due to improper recommendations involving crypto-based securities, Malecki Law’s experienced crypto investment fraud attorneys in New York can evaluate your case. Schedule a free consultation by calling (212) 943-1233 or emailing jenice@maleckilaw.com.