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The City watchdog has warned investors they risk losing their money if they buy into unregulated ‘initial coin offerings’ (ICOs) using cryptocurrencies such as Bitcoin.
The Financial Conduct Authority (FCA) has issued a health warning on ICOs, which are a digital way of raising money from the public. Online companies, such as tech start-ups, use an ICO to offer ‘tokens’ or ‘coins’ for sale to investors who must buy them using a cryptocurrency such as Bitcoin or Ethereum.
The digital coin or token is typically related to a specific firm or project, in the same vein as crowdfunding, and in return the investor may receive a share in the firm, a prepayment voucher for future services, or in some cases no value at all.
The regulator said ICOs were ‘very high-risk, speculative investments’ that put investor money at risk, and were only for ‘experienced investors’ who were ‘prepared to lose [their] entire stake’.
Most ICOs are unregulated by the FCA, and many are based overseas, meaning there is 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,’ said the FCA in a warning notice.
Whether an ICO falls within the FCA’s remit can only be identified on a case-by-case basis. Depending on how they are structured, some may involve regulated investments and firms involved in an ICO may be involved in regulated activities but the regulator said ‘many ICOs will fall outside the regulated space’.
Instead of a regulated prospectus, ICOs typically provide a ‘white paper’ setting out the benefits of the project or company, which the FCA said ‘might be unbalanced, incomplete or misleading’.
The value of the tokens issued to investors who do participate is ‘extremely volatile’ and ‘vulnerable to dramatic changes’, much like cryptocurrencies are.
In the worst case scenarios, ICOs may be a scam and ‘some issuers might not have the intention to use the funds raised in the way set out when the project was marketed’, warned the FCA.
There has been huge growth in the cryptocurrency market this year, appreciating around 600% versus the US dollar over the past 12 months.
The market is believed to be worth as much as $150 billion (£113 billion) buoyed by a number of celebrity endorsements.
Boxer Floyd ‘Money’ Mayweather has bought cryptocurrency Ethereum to invest in an ICO from start-up firm Hubii, a content distribution company.
Even socialite Paris Hilton has been investing in this unregulated market, stating she is planning to invest in LydianCoin. The idea behind the organisation is investors buy Lydian tokens in order to buy advertising campaigns from LydianCoin.
While it may have caught the attention of celebrities, the Chinese government isn’t so enamoured by the rise of cryptocurrencies and ICOs.
At the beginning of the month, China banned ICOs as part of a crackdown on risky financial products. The Chinese National Internet Finance Association described ICOs as ‘disrupting the socioeconomic order and creating a greater risk’.