The Financial Conduct Authority (FCA) has released a warning to consumers about the risks of Initial Coin Offerings (ICOs).

The term ICO refers to a digital way of raising funds from the public using a virtual currency, also known as cryptocurrency. An ICO can also be known as ‘token sale’ or ‘coin sale’.

ICO issuers accept a cryptocurrency, like Bitcoin or Ether, in exchange for a proprietary ‘coin’ or ‘token’ that is related to a specific firm or project. ICOs vary widely in design. The digital token issued may represent a share in a firm, a pre-payment voucher for future services or in some cases offer no discernible value at all. Often ICO projects are in a very early stage of development.

The FCA warns that ICOs are very high-risk, speculative investments. In a post on its website, the FCA said: “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 and prepared to lose your entire stake.”

The FCA outlined a number of risks which include:

• 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.

Luke Scanlon, a FinTech lawyer at international law firm Pinsent Masons, commented: “While the FCA has made it abundantly clear that ICOs can be high risk they have also made statements that may be taken as positive about the future of the ICOS such as ‘Many ICOs will fall outside the regulated space’ and ‘You are extremely unlikely to have access to UK regulatory protections like the Financial Services Compensation Scheme or the Financial Ombudsman Service’ rather than a firm affirmation that you will not have recourse to regulatory protection.

“Given the recent explosion in ICOs it is understandable that the FCA has produced a one-page statement. However, those seriously investigating their future as a means of raising funds and investing will need to wait for the regulator to publish a more detailed analysis of the nuanced questions it raises or asks investors to consider, before moving forward with a sufficient amount of certainty.”

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