Direct Selling and Cryptocurrencies

Direct Selling and Cryptocurrencies

ASA
There has been a recent proliferation of cryptocurrency based schemes operating in Australia. Direct Selling Australia is deeply concerned by the legitimacy of these models and urges that extreme caution be exercised by anyone looking to join a scheme that uses a cryptocurrency either for payment of bonuses or as part of their product offering.

Of particular concern is the question whether these multi-level marketing (MLM), network marketing or direct selling companies may be engaged in Ponzi or Pyramid selling schemes which are illegal under Australian Consumer Law. Globally, the direct selling industry is keen to prevent illegal activity and to protect individuals from scams. Work is on-going in many jurisdictions to track the use of digital currencies within our channel so that we can issue best practice guidance.

For schemes that make payments in digital currency under a compensation plan, we perceive the following major risks for participants:

Is the currency itself listed and stable?

There has been a huge number of new cryptocurrencies established following the meteoric rise in value of Bitcoin and the acceptance of digital currency as a concept. The stability of these new cryptocurrencies is unpredictable and their value very difficult to forecast. Many of the cryptocurrency start-ups never manage to get listed on an official exchange, and even if they do, to become successful and have any material value as a currency requires that this particular cryptocurrency becomes widely accepted, can easily be converted to money, and becomes used as payment in actual transactions.

Has the currency been properly established with a public blockchain and source code?

The complicated technical nature of cryptocurrencies makes them an ideal tool for scammers to use to their advantage. It is hard for the general public to understand how cryptocurrencies work, and almost impossible for them to verify that the claimed cryptocurrency is genuine.

Is your interest in the scheme based on a desire to trade in cryptocurrency?

The exponential increase in value of Bitcoin has led to a wave of new cryptocurrency offers entering the market, where the prospect of holding the next ‘Bitcoin’ is a very attractive proposition to potential investors.

Are you prepared for your bonus to be worth less than you expected?

Individuals who are encouraged to join a scheme based on the expectation of high returns through an appreciating cryptocurrency should be extremely vigilant. Clearly, if the currency appreciates in value then a bonus may be worth more than expected but the opposite is also likely to be true. Are you prepared for your bonus to potentially be on a sliding scale? What security would that offer?

How easy is it for you to access and spend your commission if it is paid in a cryptocurrency?

The ease with which direct sellers can access their commission if paid in cryptocurrency is of some concern. The profile of many direct sellers suggests that immediate access to earnings is an important feature and this may not be compatible with digital currencies.

Are there concerns around cryptocurrencies being the ‘product’ or ‘service’ provided?

MLM embraces compensation in direct selling where a company deals in the exchange of products via retail sales in return for retail profit and or commissions from those sales, through a Network of distributors. If no product or services changes hand, and commissions are delivered from recruitment only, then it could be considered a pyramid and as such is not legal in Australia.

Whilst we recommend extreme caution be taken in assessing any scheme that pays in a cryptocurrency; schemes that sell a cryptocurrency are in breach of the WFDSA Code of Ethics and should be avoided.

Direct Selling Australia will continue to conduct further research in this area and seek advice from our counterparts in other countries. In the meantime, we urge you to proceed with extreme caution.

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