The UK’s Financial Conduct Authority (FCA) issued a statement today, warning consumers about the potential risks associated with initial coin offerings. The watchdog described ICOs as “very high-risk, speculative investments”, adding that consumers should be “conscious of the risks involved and fully research the specific project if you are thinking about buying digital tokens”.
Some of the risks highlighted by the FCA included the lack of regulation and protection for investors, the high price volatility associated with digital tokens and the potential for fraud.
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“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,” the FCA warned.
ICOs have exploded in popularity this year, becoming the preferred method for raising capital by blockchain startups. With this method, which is also known as “digital coin/token sale”, a company or an individual issues a proprietary token and sells it for cryptocurrency like Bitcoin (BTC) or Ethereum (ETH). The majority of ICOs are based on the Ethereum network.
While the practice has become increasingly popular among startups, it has also attracted a lot of criticism and regulatory scrutiny. Last week, Chinese regulators banned ICOs in the country, causing panic among cryptocurrency investors. At the same time South Korea’s Financial Services Commission pledged to strengthen its “levels of punishment” for companies looking to raise funds through ICOs.
The US Securities and Exchange Commission was the first to raise a red flag in July, when it decided that federal securities laws may apply to some ICOs. Regulators in Singapore and Canada have also cautioned investors about the sector.