On Tuesday, the UK watchdog shone a light on the largely unregulated ICO space, calling the investments “very high-risk” and “speculative”.
Also known as a “token sale” or “coin sale,” an ICO is a public, digital fundraising initiative involving cryptocurrencies such as Bitcoin and Ether.
Sometimes thought of as a digital corollary of an initial placement offer (IPO), ICOs see issuers provide prospective investors with a proprietary coin or token related to a specific firm or project, in exchange for cryptocurrencies.
However the FCA noted that the unregulated nature of the space, and lack of investor protection, mean the ICO industry could be a potential hotbed for fraud.
Risks
The vast majority of ICOs are not regulated by the FCA and many are based overseas, making it extremely unlikely for investors to have access to regulatory protections like the Financial Services Compensation Scheme or the Financial Ombudsman Service.
Furthermore, the lax documentation requirements around ICOs also make it easier for issuers to take advantage of and defraud investors.
Given that many ICO tethered projects are in a very early stage of development and involve “experimental business models”, the regulator stressed there is a high probability of investors losing their entire stake, one of the reasons only experienced investors should engage in this kind of digital fundraising.
Who should invest?
“You should only invest in an ICO project if you are an experienced investor, confident in the quality of the ICO project itself (e.g. business plan, technology, people involved) and prepared to lose your entire stake,” it stressed.
However, the regulator conceded there could be some ICO cases which fall within the bounds of its jurisdiction, like those which involve regulated firms or investments or if a token can be construed as a transferrable security.
The FCA urged investors who suspect they have spotted a scam ICO to report it to its website via its online form.
