In the past week the CFTC and the SEC have continued their focus on the cryptocurrency industry. Here is a summary of the most significant and interesting enforcement-related news from the past week.
CFTC Publishes Customer Advisory. On Monday, July 16, 2018, the Commodity Futures Trading Commission (CFTC) published a customer advisory warning customers about the need to exercise caution and conduct extensive research before purchasing virtual coins or tokens. The advisory notes that that the market for digital coins and tokens is very young and that there is no widely-accepted standard for placing a value on particular coin or token.
The advisory lists a series of factors to weigh when considering the purchase of a digital coin or token, including, decreasing mining or validation costs (if price is tied to those factors), acceptance of other currencies, coins, or tokens for offered goods and services, adoption of the digital coin or token as a broad medium of exchange or store of value, future demand or uses for an application, network, product or service, and risk of theft from hacking. The advisory warns that the digital coins could be securities and subject to federal securities laws if initial buyers are told that the developers or promoters will bring investors a return on their investment or if the investors are promised a share of future returns on the project.
The CFTC also warns that fraud is another significant risk to consider and provides four reminders to customers: (1) conduct extensive due diligence on any individuals and entities listed as affiliates of a digital coin or token offering; (2) before investing ask whether the digital coins are securities and if the offering is registered with the SEC; (3) find out how your money will be used, if you can get it back, and what rights the digital coin or token provides; and (4) beware of promises of quick wealth or guaranteed returns.
SEC Blocks Kodak Cryptocurrency Mining Computer. On Monday, July 16, 2018, Spotlite USA announced the SEC had blocked its plan to lease the bitcoin-focused Kodak KashMiner, a cryptocurrency mining computer. Spotlite had planned to lease it for $3,400 for two years and had advertised that it would give customers half the currency the machine generates while keeping the rest. Spotlite stated the computer would generate a value of $375 a month, or a total of $9000 over the two years, given an average bitcoin price of $14,000. However, skeptics of the plan were vocal and an economics professor stated that the price of bitcoin would need to hover around $28,000 to deliver Spotlite’s suggested level of return. Considering bitcoin’s all time high was $19,783, and is currently trading around $7,400, netting a solid return from the KashMiner seemed relatively unlikely. The bitcoin miner had been on display at Kodak’s official stand at the CES technology show in Las Vegas in January, earlier this year.