The CFTC warned customers to conduct thorough research before purchasing digital coins or tokens (including self-described "utility coins" and "consumption coins").
In a Customer Advisory, the CFTC cautioned virtual currency customers to understand the rights provided by a digital coin or token and the "factors [that] could affect its value." The CFTC warned that customers should be particularly wary of any coin or token that includes a promise of future value. The CFTC pointed to research indicating that a substantial percentage of Initial Coin Offerings ("ICOs") are fraudulent or do not deliver on promises to customers (with reports estimating that between 5 and 80 percent of ICOs are fraudulent).
The CFTC highlighted several factors for customers to consider regarding the future value of digital coins or tokens. These include (i) market liquidity, (ii) the emergence of other digital assets that may reduce demand, or render a coin or token obsolete, (iii) changes to underlying technology and (iv) susceptibility to hacking or cyber theft.
Before purchasing digital coins or tokens, the CFTC reminded customers that it is important to (i) conduct research on all "individuals and entities listed as affiliates of a digital coin or token offering," (ii) verify how the money will be utilized and (iii) confirm whether the digital coins or tokens are securities. In the event that the virtual currencies are securities, the buyer should verify that the offering is registered with the SEC.
Commentary / Joseph V. Moreno
The CFTC's customer advisory drives home several important points – namely, that the digital asset industry is very new and constantly evolving, placing a value on digital coins and tokens is tricky, and many ICOs and other crypto-related transactions end in failure or fraud. Investors and enthusiasts are cautioned to temper their excitement for this technology with a wide-eyed view of the potential risks. Always ask questions, conduct due diligence, and understand your rights before diving in.
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