On July 16, 2018, the US Commodity Futures Trading Commission (CFTC) published a customer advisory about the need to exercise caution and conduct research before purchasing virtual coins or tokens. "Understand what rights are attached to the coin or token being sold, and what underlying factors could affect its value," the agency wrote. "Be especially wary of promises or guarantees of future value." In its advisory, the CFTC alluded to the "network effect," which many projects have claimed will result in an increase in the value (read: price) of their associated digital tokens.
Readers may remember that ETHNews recapped a CFTC podcast episode from January, in which Andreessen Horowitz general partner Alex Rampell emphasized the opportunity to "bootstrap" the network effect through blockchain-based digital assets. Backed by Andreessen Horowitz, Filecoin is one project that has sought to capitalize on the network effect. In August 2017, Protocol Labs raised approximately $186 million worth of financing through its initial coin offering (ICO) for the distributed/peer-to-peer file storage system. However, nearly a year after its ICO, the project has yet to launch. That's not to say the idea is without merit. Imagine if Filecoin did to the cloud storage industry what Airbnb has done to the hotel industry. Reshaping the digital economy could be a gamechanger… if it works.
These are the sorts of promises that have invited rampant speculation in the blockchain/cryptocurrency industry. Who wouldn't want to have a small stake in the next Dropbox? What's been especially challenging for cryptocurrency enthusiasts is that these digital assets or tokens aren't always what they seem, and in many cases, it looks like founders may never deliver on the promises they've made to their backers. There has been confusion about whether tokens represent equity in a company or simply some sort of access token (akin to a fixed-value gift card). But, that hasn't stopped retail investors from clamoring for a piece of the venture capital pie – even before they know the flavor. In their mad dash to digital wealth, many have ignored fundamentals altogether, focusing instead on turning a quick profit. (As long as I can sell my coins to a greater fool, then who cares if the executive team disappears?)
In its advisory today, the CFTC provided a list of factors for potential token buyers to consider. These include:
The agency also encouraged buyers to "conduct extensive due diligence" and "before investing in an ICO, ask whether the digital coins or tokens are securities and if the offering is registered with the Securities and Exchange Commission (SEC)." All we can say is this: You can lead a horse to water...
Matthew is a full-time staff writer for ETHNews with a passion for law and technology. In 2016, he graduated from Georgetown University where he studied international economics and music. Matthew enjoys biking and listening to podcasts. He lives in Los Angeles and holds no value in any cryptocurrencies.
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