FCA warns on Initial Coin Offerings

The Financial Conduct Authority has issued a warning over the newest digital investing trend, Initial Coin Offerings (ICOs).

ICOs are a digital way of raising money from investors by issuing a virtual currency, also known as cryptocurrency.

An ICO can also be known as ‘token sale’ or ‘coin sale’.

In a new statement from the FCA, the regulator has warned investors these are very high-risk, speculative investments.

The FCA has highlighted several risks associated with ICOs:

Unregulated space: Most ICOs are not regulated by the FCA and many are based overseas.

No investor protection: You are extremely unlikely to have access to UK regulatory protections like the Financial Services Compensation Scheme or the Financial Ombudsman Service.

Price volatility: Like cryptocurrencies in general, the value of a token may be extremely volatile – vulnerable to dramatic changes.

Potential for fraud: Some issuers might not have the intention to use the funds raised in the way set out when the project was marketed.

Inadequate documentation: Instead of a regulated prospectus, ICOs usually only provide a ‘white paper’. An ICO white paper might be unbalanced, incomplete or misleading. A sophisticated technical understanding is needed to fully understand the tokens’ characteristics and risks.

Early stage projects: Typically ICO projects are in a very early stage of development and their business models are experimental. There is a good chance of losing your whole stake.

Put simply, you should only consider investing in an Initial Coin Offering if you are a very experienced investor and you are prepared to lose your entire investment.

With generally no regulatory protection in place for investors, when ICOs go wrong, consumers will have no recourse to the Financial Ombudsman Service or Financial Services Compensation Scheme.

According to the FCA, “Many ICOs will fall outside the regulated space. However, depending on how they are structured, some ICOs may involve regulated investments and firms involved in an ICO may be conducting regulated activities.”

The consumer warning on ICOs comes shortly after The People’s Bank of China, and other Chinese regulatory authorities, ruled that ICOs are illegal, banning them from taking place in the country.

Here at Informed Choice, we have been keeping a close eye on ICOs and cryptocurrency in general.

Recent price rises for the most popular cryptocurrencies, including Bitcoin, suggests ‘bubble’ behaviour in this market and comparisons to the tulip mania of the 17th century seem reasonable.

ICOs and cryptocurrency are not suitable investments for the vast majority of retail investors who stand to suffer substantial losses if they dabble in this market.