CFTC advises careful research before investing in ICOs
The Commodity Futures Trading Commission (CFTC) issued an advisory notice on initial coin offerings (ICO) on Monday night, warning investors to “conduct extensive research” before buying digital coins and tokens.
It warned that many ICOs end up as either frauds or failures, but even among those that succeed, the CFTC advised, “be especially wary of promises or guarantees of future value”.
Know your rights
While some ICOs claim that the tokens issued can be used to purchase goods, services or platform access in the future, commonly a company may require that its digital coins can only be redeemed to purchase that company’s own products or services.
The regulator outlined: “Understand what rights are attached to the coin or token being sold, and what underlying factors could affect its value. Be especially wary of promises or guarantees of future value.”
The Securities and Exchange Commission (SEC) has repeatedly said it views many existing digital currencies such as bitcoin to be more like commodities and, therefore, do not come under its regulatory reach.
In March, a New York district judge ruled that virtual currencies could be regulated by the CFTC as commodities. Indeed, the CFTC, which has regulatory oversight of the commodities and currencies futures and options markets, had defined cyrptocurrencies as commodities as long ago as 2015.
In its advisory notice on Monday night, the CFTC outlined to potential investors a number of factors that could impact the value of digital coins. These included:
- Forks could split away market participants, increase the number of coins or make your coins obsolete
- Decreasing mining or validation costs – if your price is tied to those factors
- Acceptance of other currencies, coins or tokens for offered goods and services
- Future competition or technological advances that could disrupt the underlying business
- Lack of liquidity in the market for specific coins and tokens
- Risk of fraud and theft from hacking.
To protect investors from the above and the wider implications of fraud, the CFTC advised the following steps:
- Conduct extensive due diligence on individuals and entities listed as affiliates of an ICO
- Before investing in an ICO, check if the digital tokens or coins are registered with the SEC
- Find out how the funds raised in the ICO are to be used and what rights the token or coin provides you. Read the White Paper carefully
- Beware promises of quick and easy, or guaranteed profits. Many ICOs are still frauds