Picture: KARATBARS WEBSITE
Picture: KARATBARS WEBSITE

The financial sector regulator has issued a stern warning to stay away from Karatbars, a multilevel marketing company that is offering “investments” to South African consumers via WhatsApp.

Karatbars International is not authorised to render financial advice and intermediary services in SA, the Financial Sector Conduct Authority (FSCA) said in a media release issued this week.

The regulator says the German-based company, which sells “bank” cards and “bank” notes “embedded with one-ounce bars of gold” is not authorised to operate here.

According to Karatbars’ website, the company operates in 140 countries, has more than 800,000 affiliates (or members) and has an annual turnover of €100m. 

Founded in 2011, it moved into cryptocurrencies in July 2018 when it launched KaratBankCoin (KBC), later renamed KaratGoldCoin, a gold-backed crypto.

But regulators in the Netherlands, Canada and Namibia have all issued warnings about Karatbars, with the latter calling it a pyramid scheme.

In October, Coindesk.com reported that the Florida Office of Financial Regulation is investigating Karatbars’ claim that its KBC is connected to a cryptocurrency bank in Miami.

Also in October, a reputable blockchain and cryptocurrency news site, Cryptodaily.co.uk, reported that popular cryptocurrency ranking platforms Coingecko and CoinMarketCap had issued public warnings about Karatbars. 

The cryptocurrency industry is unregulated in South Africa and as long as it is there will be charlatans offering dodgy services.
Marius Reitz, the general manager for Africa at Luno

Irlon Terblanche, the CEO of Blockchain Capital, says all three sites (cryptodaily.co.uk, CoinGecko and CoinMarketCap) are credible and trustworthy sources.

He says that if people want to invest in a cryptocurrency, the price of which is tied to an asset like gold, they may as well just buy the actual gold, and not the cryptocurrency that represents a claim on that gold.

In the case of Karatbars, it’s even worse because the company backing the coin is not regulated in SA  and there is no oversight to ensure it treats customers fairly. “It is completely dodgy,” he says.

Marius Reitz, the general manager for Africa at Luno, says the cryptocurrency industry is unregulated in SA and as long as it is there will be charlatans offering dodgy services.

He says about 90% of cryptocurrencies are small projects with little prospect of success, and some are scams.

Luno lists only three cryptos on its platform, Reitz says, because cryptos are a fairly new industry, with Bitcoin being only 11 years old, and there is still a huge gap in consumers’ understanding of them. “So we offer only the safest and most popular coins,” he says.

Crypto investing is for people with an appetite for risk and funds to lose, meaning no more than a single digit percentage of your assets.

As any good financial planner will tell you: Don’t invest in something you don’t understand or put all your eggs in one basket, he says. Consumers should be extra vigilant when it comes to cryptos because they are unregulated, so there is no recourse when it turns out to be a scam.

“My advice is start small by investing R10. Then force yourself to learn about the tech. Find a reputable platform and go with the top five coins, because they have a decent track record and are fairly liquid, so you can liquidate your holding easily,” says Reitz.

David Kop, the executive director: relevance at the Financial Planning Institute of SA, says the aggressive use of social media to spread the offering should raise alarm bells. Social media enables the scheme to take a “shotgun approach” to reaching people.

He says the many enthusiastic testimonies from people who have made money out of the scheme play to our fear of missing out. With the advent of video technology these testimonies take the form of YouTube videos, which a random Google search will yield. Pyramid and Ponzi schemes rely on more and more people buying into the scheme.

When an offering is not licenced this should be of utmost concern to any would-be investor. “There are many schemes that have been specifically designed to be outside the current regulatory net, or are new technologies, such as cryptocurrencies which may not be covered by current regulations.”

Unrealistic returns should also raise alarm. “A careful analysis of the returns offered and how they will be generated must be undertaken.” In the current economic environment when returns offered by investments are low and consumers are looking for better returns, pyramid and Ponzi schemes seem a better alternative.  

Kop says that any one of the above indicators doesn’t mean the offering is a scam, but should prompt you to approach it with a higher dose of scepticism. “When in doubt, it’s best to seek out a certified financial planner professional who would be able to offer professional advice.”