In a new customer advisory, the Commodity Futures Trading Commission (CFTC) has alerted customers to exercise caution and conduct extensive research prior to engaging in cryptoasset trade, especially if purchasing cryptoassets from initial coin offerings (ICOs). Specifically, the CFTC refers to studies and reports which estimate that fraud among ICOs ranges anywhere from 5 to 80 percent, with one report uncovering around 300 ICOs containing plagiarised investment documents, promises of guaranteed returns, or fake executive teams.
The CFTC also notes that proper due diligence should be undertaken regarding the specific legal nature of an ICO or cryptoasset, as their structure will dictate whether they may be considered securities, derivatives or commodities, and thus what laws may apply to them.
The CFTC warns that if you are considering purchasing cryptoassets, you should consider some of the factors that may affect their long-term value. These may include:
- 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 full customer advisory is available here.
As we have highlighted elsewhere, anyone engaged or affiliated with cryptoassets must undertake both appropriate technical and legal due diligence. Although this market is fast moving, with new, exciting, innovative products and services being offered, its novelty brings with it many legal pitfalls and risks. These may include:
- Recharacterisation of the cryptoasset’s legal nature (recharacterisation risk);
- Hacks (cybersecurity risk); and
- Loss of your private key that controls your cryptoassets (technology risk).
As a relatively new phenomenon, cryptoassets are subject to many risks and disadvantages. However, this does not take focus away from the many real use cases for cryptoassets and blockchain technology that have been deployed and are currently under development, including tokenisation of “real world” assets.
Nevertheless, if you are engaged, or considering becoming engaged, in any activities involving cryptoassets or cryptocurrencies, adequate and appropriate legal or investment advice should be sought. Our FinTech Task Force across our offices monitors the global FinTech and RegTech developments. Get in touch if we can be of any assistance.