A UK regulator has issued a warning about Initial Coin Offerings (ICOs), branding them “very high-risk, speculative investments”.
In its warning, the Financial Conduct Authority (FCA) said consumers should be “conscious of the risks involved and fully research the specific project” before partaking in this typically unregulated means of investment.
ICOs, whereby companies raise funds from the public by issuing a virtual currency, have become increasingly common in recent times. Through this process, also referred to as a ‘token sale’ or ‘crowdsale’, investors are able to purchase a percentage of the newly issued cryptocurrency in exchange for a legal tender or other virtual currencies.
The FCA said: “You should only invest in an ICO project if you are an experienced investor, confident in the quality of the ICO project itself and prepared to lose your entire stake.”
In terms of associated risks, the FCA highlighted the fact that ICOs are typically unregulated. Additionally, the warning noted cryptocurrencies’ intrinsic price volatility and the potential for fraud.
Other highlighted risks included the fact that most ICO projects are in very early stages of development and operate experimental business models.
Tackling the security cultural mountains
Aside from warning consumers, the FCA also touched on the need for firms to act responsibly if considering raising funds in this way: “Businesses involved in an ICO should carefully consider if their activities could mean they are arranging, dealing or advising on regulated financial investments.
“Each promoter needs to consider whether their activities amount to regulated activities under the relevant law. In addition, digital currency exchanges that facilitate the exchange of certain tokens should consider if they need to be authorised by the FCA to be able to deliver their services.”