NASAA Warns Investors of Fraud in the Metaverse
Commentary by Steven Lofchie
The North American Securities Administrators Association ("NASAA") warned investors of potential financial scams in the Metaverse and recommended that investors do their due diligence.
NASAA defined the Metaverse as referring to "online virtual worlds that stand alone or are interconnected." The state regulators encouraged investors to follow similar due diligence obligations in the Metaverse as those for a non-virtual investment. These include:
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safeguarding passwords and other personal information;
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ensuring that the investment entity is registered with a securities regulator;
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monitoring for "flashy" and "hyped up" marketing techniques, as these are typically indicative of fraud;
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avoiding discussion of investments using public chat forums;
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keeping clear of Metaverse-related cryptocurrency and non-fungible token ("NFT") investments;
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being wary of fake news and celebrity gossip promoting certain investments;
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attempting to engage in real world contact prior to investing to verify legitimacy;
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disregarding any investment advice that does not come from an approved adviser; and
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identifying obvious red flags such as a "no loss guarantee" or no risk investments.
NASAA also encouraged investors to immediately report any suspicious activity or potential fraud to state securities regulators and authorities.
Commentary
NASAA's advice is well meaning. It is not entirely practical. Particularly in light of Regulation Best Interest, broker-dealers are less likely to give advice to clients on digital assets, as the risks of making a recommendation are too great. Many retail investors are not able to afford a registered investment adviser. So, as a practical matter, investors will take their advice from unregulated or free sources. NASAA should consider ways in which the quality of information available to retail investors can be improved; simply imposing additional requirements on regulated entities will not do the trick - it will just further discourage them from touching the area.