US CFTC Warns Investors about ICO, Utility Token Risks

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).

The utility tokens are a kind of user tokens that enable clients to access a blockchain-based platform or service (e.g. food delivery or online games). If the project behind that utility asset succeeds, then the early token investor, will sell their coins with a high profit.

“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,” CFTC said.

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

  • the hard fork possibility that can split the market and make the tokens ‘obsolete’;
  • decreasing mining and validation costs;
  • the risk utility tokens not to be used as a payment vehicle in the proposed blockchain services when they become fully operational;
  • if there will be a real link the value of utility tokens and the success of their projects;
  • if the coins will become a broad medium of exchange or store of value;
  • risk from competitors’
  • the financial sustainability of the proposed projects;
  • liquidity of the market that the utility token targets;
  • changes in the blockchain technology;
  • risk of hacking.

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.