CFTC warns crypto customers of fraud and false promises

Posted: 17 July 2018 1:03 pm

The regulatory body insists potential buyers research coins and exercise caution to avoid fraud and failure.

The Commodity Futures Trading Commission (CFTC) has released a warning to potential buyers and traders of “utility coins” or “consumption coins” and tokens, cautioning against rushed decisions and a lack of research.

The advisory alerts customers to consider the different rights and responsibilities attached to coins or tokens being sold and to understand, through investigation, the underlying factors that may affect their value.

The CFTC suggests that, because of the cryptocurrency market’s immaturity and novelty, there is no widely-accepted standard for placing value on a particular digital token or coin. Some are sold as stores of value to purchase good or services, while others offer users access to a platform or a pledge of future assurances.

“Be especially wary of promises or guarantees of future value,” the CFTC customer advisory said.

Many businesses, often startups, use funds derived from the sale of coins or tokens to support their operations.

“Commonly, a company will also require that its digital coins or tokens be redeemed to purchase its product or service,” the CFTC said. “Even future customers would need to purchase and redeem the digital tokens for access. These offerings may contend that if the product, service or network becomes more popular, then the digital tokens may increase in value due to a ‘network effect’ and could be sold to others buyers for a profit.”

If promoters or developers promise initial buyers a return on their investment or a share of future returns, these digital coins or tokens may be regarded as securities rather than cryptocurrencies and would be subject to federal securities laws. The Securities and Exchange Commission (SEC) recently determined that cryptocurrencies bitcoin and ether are not recognized as securities under federal government regulations.

As part of the customer advisory, the CFTC outlined a number of different factors that may impact future value. These include the potential for hard or soft forks, mining validation costs, acceptance of other currencies or tokens for offered goods or services, adoption of the digital coin or token as a broad medium of exchange or store of value, future competitors or disruptive technological advances, demand, liquidity and risk of theft.

The latest cryptocurrency research report revealed that the overwhelming majority of initial coin offerings (ICOs) last year were determined to be scams, while only a small fraction successfully traded on an exchange.

A separate digital currency study released earlier this week revealed that of the thousands of ICOs that were completed before May this year, a little more than half failed within the first four months of listing.

However, trading giant eToro suggest that cryptocurrencies could replace fiat currency in as little as a decade.

You can learn all about different exchanges, understand exactly how to buy and sell cryptocurrencies, calculate your taxes, discover digital wallets to hold assets and explore a list of all the alternative coins on the market.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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