Don’t get ICO icky, sit pretty with FCA advice

Don’t get ICO icky, sit pretty with FCA advice

The UK’s Financial Conduct Authority is warning consumers about the risks of initial coin offerings (ICOs).

ICOs have proved very popular in the worlds of blockchain and cryptocurrency, which many funding stories flowing on a regular basis. However, last month, BBVA reckoned the fever for ICOs in blockchain must be cooled as the industry is facing a “dangerous bubble” driven by speculation.

According to the FCA, ICOs “vary widely in design”; are in a “very early stage of development; and are “very high-risk, speculative investments”.

The FCA warns: “You should be conscious of the risks involved and fully research the specific project if you are thinking about buying digital tokens. 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 regulator cites a number of risks:

  • 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.

Whether an ICO falls within the FCA’s regulatory boundaries or not “can only be decided case by case”. But it says many ICOs will fall outside the regulated space.

If you suspect that an ICO is a scam, the FCA wants people to report it to them.