US CFTC Warns Investors about ICO, Utility Token Risks

Published on 17 July 2018 by Cryptovest Staff

The US Commodity Futures Trading Commission called on citizens to carry out detailed research before purchasing digital coins through ICOs.

The US Commodity Futures Trading Commission (CFTC) has appealed to investors to be cautious and to conduct serious research before giving money to virtual currency projects, CFTC said in a public warning issued on Monday. The Commission is particularly concerned by ‘utility tokens’ that are issued during the crypto fundraising method of Initial Coin Offering (ICO).

“Buying digital coins or tokens only because you expect to sell them at a higher price later is the definition of speculation and carries considerable risk, regardless of how good a white paper, application or business plan sounds. Unfortunately, fraud is another significant risk to consider. Your best protection is to thoroughly research digital coins or tokens and exercise caution,” CFTCsaid.

The future value of utility tokens is subject to several key factors, according to CFTC crypto warning:

  • Hard fork risk: The possibility that a hard fork can split the market and render the tokens ‘obsolete’.
  • Decreasing costs: Reductions in mining and validation costs.
  • Adoption risk: The risk that utility tokens may not be used as a payment vehicle in the proposed blockchain services when they become fully operational.
  • Project success linkage: Whether there is a real link between the value of utility tokens and the success of their projects.
  • Medium of exchange risk: Uncertainty if the coins will become a broad medium of exchange or store of value.
  • Competitive risk: The risk posed by competitors in the market.
  • Financial sustainability: Concerns about the financial sustainability of the proposed projects.
  • Market liquidity: The liquidity of the market that the utility token targets.
  • Technological changes: Potential changes in the blockchain technology.
  • Hacking risk: The possibility of hacking incidents affecting the tokens.

CFTC also reminded investors to check if the respective cryptocurrencies are securities, commodities or derivatives and if they have a registration with other US federal regulators, the Securities and Exchange Commission (SEC). Last month, SEC Chairman Jay Clayton said that ICO tokens are securities while Bitcoin, as a fiat substitute, is not part of this category.