On February 15, the U.S. Commodity Futures Trading Commission published an official warning advising investors to be cautious of potential pump-and-dump schemes. The warning also encourages the public to report any information that could lead to enforcement action.
The CFTC’s advisory was released a day after the Technical Advisory Committee (TAC) held a public meeting to discuss regulation in the crypto space. A significant portion of the meeting was dedicated to initial coin offerings (ICOs), particularly the role of tokens and how they can be shared with investors. The meeting also raised discussion on the need to clearly draw distinctions between different types of crypto assets, their technologies included.
In August 2017, the US Securities and Exchange Commission (SEC) published a warning alerting investors about ICO scams. In a Senate hearing earlier this month, SEC chairman reiterated the importance of taking ICO fraud more seriously and making sure that companies follow the regulation in place. Recent pump-and-dumps like LoopX — which managed to raise $4.5 million before disappearing — highlight the need for strict regulation. Now the CFTC is doing its part by urging investors to be cautious and do their due diligence before contributing money. The warning reads:
Customers should not purchase virtual currencies, digital coins, or tokens based on social media tips or sudden price spikes. Thoroughly research virtual currencies, digital coins, tokens, and the companies or entities behind them in order to separate hype from facts.
The note goes on to detail typical framework most scams follow, stating that most ICOs “organize anonymously and hype the currencies and tokens using social media.” Once they have spread the hype, they countdown to the tokens’ “pump.” When the price reaches a certain price, the company dumps all its coins onto the market. Lack of demand drives the price down, leaving investors with practically worthless tokens.
Commonly, it is the people pulling the strings who get out first making the most in the scheme, and leaving everyone else scrambling to sell before losing their investments.
According to the statement, scams like these are not really know. In the past, “pump-and-dump” schemes occurred in the form of “peddled penny stocks” that companies claimed were on the cusp of experiencing a “major breakthrough.” Once the price rose, companies would release their shares, resulting in a price crash. Essentially, fraudulent ICOs play the same game under the guise of a valuable cryptocurrency.
The CFTC admitted that its authority over ICOs is currently limited. However, it is working with coin exchanges to identify fraudulent ICOs and prevent them from entering the market. At the end of the day, it is up to individuals to make smart choices regarding their investments.
The post CFTC Issues Warning Against ‘Pump-and-Dump’ Schemes appeared first on IQ Option Blog.