Use Caution When Buying Cryptocurrencies, Says CFTC

Investing, News | July 17, 2018 By:

The US Commodity Futures Trading Commission (CFTC) has advised consumers to do their homework before purchasing cryptocurrencies.

In a customer advisory, the CFTC told investors to exercise caution and conduct extensive research before purchasing digital coins or tokens, including those self-described as “utility coins” or “consumption coins.”

“This advisory is part of the CFTC’s education and outreach efforts to help educate and inform market participants, who, given the pace of technology-driven change, will increasingly come in contact with new financial products and services,” said Erica Elliott Richardson, Director of the Office of Public Affairs and Office of Customer Education and Outreach. “The CFTC’s Office of Customer Education and Outreach closely coordinates with LabCFTC in order to keep pace with developments in the markets the CFTC regulates, and we look forward to staying ahead-of-the-curve in providing customers the information they need to protect themselves against fraud or manipulation in the marketplace.”

CFTC said that would-be buyers should understand what rights are attached to the coin or token being sold. The regulator said these rights should be clearly spelled out in the business plan, white paper or development plan, and investors should keep copies of this information.

Potential buyers should also weigh factors that could impact the token’s current or longer-term value. These include:

  • The potential for forks in open-source applications that could split away market participants, increase the number of digital coins, or make your coins obsolete.
  • Decreasing mining or validation costs (if price is tied to those factors).
  • Acceptance of other currencies, coins, or tokens for offered goods and services.
  • The link between the value of a digital coin or token and the offered product or service.
  • Adoption of the digital coin or token as a broad medium of exchange or store of value.
  • Future competitors or technological changes that could disrupt the underlying business.
  • Future demand or uses for an application, network, product, or service.
  • Liquidity in the market for a specific digital coin or token.
  • Changes to the underlying technology that could devalue your digital coins or tokens.
  • Risk of theft from hacking.

The CFTC also warns investors to view any promises or guarantees of future value as a “red flag.” As the market is relatively new, there remains no accepted standard in valuing a digital coin or token.

“Beware promises of quick wealth or guaranteed returns. There is no such thing as a guaranteed investment or trading strategy,” the advisory said.