On July 16, 2018, the Commodity Futures Trading Commission (“CFTC”) issued a customer advisory on digital tokens. Citing various studies and reports, the advisory identified high rates of fraud in some initial coin offerings, and warned investors to be on the lookout for the following risks associated with investing in digital tokens:
- The potential for forks in open-source applications that could split away market participants, increase the number of digital coins or make coins obsolete.
- Decrease in 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 digital coins or tokens.
- Risk of theft from hacking.
The CFTC has largely ceded enforcement authority for digital tokens that are securities to the Securities and Exchange Commission, but the advisory reminds readers that “digital tokens and coins can also be derivatives or commodities, depending on how they are structured.”