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CFTC Issues Advisory on Virtual Currency ICOs
Practical Law Legal Update w-015-8316 (Approx. 5 pages)
CFTC Issues Advisory on Virtual Currency ICOs
by Practical Law Finance
| Published on 19 Jul 2018 • USA (National/Federal) |
The CFTC published a customer advisory on virtual currencies warning potential investors of the risks of purchasing virtual coins or tokens in an initial coin offering (ICO).
On July 16, 2018, the CFTC published a customer advisory on virtual currencies warning potential investors of the risks of purchasing virtual coins or tokens in an initial coin offering (ICO), including those described as "utility coins" or "consumption coins." The advisory warns that potential investors should:
- Use caution before purchasing digital coins or tokens in an ICO.
- Conduct thorough research into the digital coins and tokens before purchasing.
- Conduct thorough research into the individuals, entities, and affiliates offering the digital coins or tokens.
- Be suspicious of guarantees of future value.
The advisory notes the risks of the "very young" virtual currency market and lack of standardization in how value is assigned to a digital coin or token. It also references news reports indicating that a large number of ICOs are fraudulent or fail within a year. According to the CFTC, the warnings are intended to promote caution and encourage potential investors to recognize the "red flags" of promises or guarantees of future value.
The advisory additionally notes that, depending on the facts and circumstances, digital coins or tokens may be:
- Securities that are subject to federal securities laws.
- Derivatives or commodities that are subject to the Commodity Exchange Act (CEA).
The advisory also provides a list of factors that can impact the future value of a digital coin or token, and suggests that potential investors weigh the factors when considering a purchase. The factors include:
- Whether there will be an increase in the number of digital coins or the current digital coins will become obsolete.
- Whether a digital coin or token will have decreasing mining or validation costs.
- Whether other currencies will be accepted for the offered goods or services.
- Whether the digital coin or token will become accepted as a broader medium of exchange.
- The impact of future technological developments or competitors.
- Whether there will be future demand for the digital coin or token in other uses.
- The liquidity of the digital coin or token.
- Potential technological changes that could decrease the value of the digital coin or token.
- Potential risk of theft from hacking.
The advisory also includes suggestions for avoiding fraud. These suggestions include:
- Exercise of caution if information cannot be easily ascertained regarding the affiliated entities or individuals involved in the ICO.
- Verifying whether the digital coins or tokens are securities and whether the ICO is registered with the SEC.
- Ascertaining how the potential investor's money will be used and what rights the digital coins or tokens afford the investor.
- Being wary of promises of quick or guaranteed returns.
- Reporting fraud or theft at CFTC.gov/TipOrComplaint.
This is the CFTC's fourth customer advisory on virtual currencies. Previous advisories include:
- Beware Virtual Currency Pump-and-Dump Schemes (see Legal Update, CFTC Issues Virtual Currency Warning).
For information on the CFTC's statements on cryptocurrencies and ICOs, see Legal Update, SEC and CFTC Issue Statements on Cryptocurrencies and Initial Coin Offerings.
For information on virtual currency regulation, see Practice Note, Virtual Currency Regulation: Overview and Virtual Currency and Digital Asset Regulatory Tracker.