Investors getting involved in initial coin offerings that offer digital tokens for a supposed stake in a business were warned today that they risk losing all of their money.
The UK financial watchdog has said that investors seeking to get into the world of cryptocurrencies such as Bitcoin and Ethereum should approach the fast-growing Initial Coin Offerings sector with care.
Firms launching ICOs are typically start-ups issuing tokens or coins that can be used in the future to buy their goods or services, or are claimed to represent a stake in the business – with investors paying for them using a cryptocurrency.
‘High-risk’: ICOs are digital ‘tokens’ or ‘coins’ issued to investors by firms in exchange for cryptocurrency like Bitcoin
The Financial Conduct Authority said ICOs were ‘high-risk’ investments since they come with no investor protection, their value is volatile and can often be linked to illegal schemes or fraud.
ICOs involve digital ‘tokens’ or ‘coins’ issued to investors by firms, often start-ups, which want to raise funds for their business or a specific project, bypassing banks and venture capitalists, in a similar way to crowdfunding.
But in some cases ICOs ‘offer no discernable value at all’, the FCA said, warning they are ‘very-high, speculative investments’ for several reasons.
It sounded the warning as ICOs have become very popular very quickly. Companies raised some $2.12billion through ICOs so far this year – more than double last year’s total amount of $96.4million, according to data by CoinSchedule.
This has contributed to a cryptocurrency boom. The best known Bitcoin has risen by 340 per cent since the start of 2017, while rival cryptocurrency Ether has risen by 3,380 per cent, according to CoinDesk.
Ether is a tradeable cryptocurrency and also used to pay for fees and services on the Ethereum blockchain – a network that can be used by developers to build blockchain-based applications.
ICOs are not currently regulated, which means that if investors lend money to a fraudulent firm, they will be unable to recover it. In fact, the FCA warned that some companies issuing ICOs may be fraudulent.
Often projects that are funded through ICOs are in a very early stage of development, which means that possibilities of the company or project failing – and hence investors losing all their stake – are highly likely.
Companies raised some $2.12billion through ICOs so far this year – more than double last year’s total amount of $96.4million, according to data by CoinSchedule
The FCA also said that the value of ICOs, like cryptocurrencies in general, may be ‘extremely volatile’, vulnerable to ‘dramatic changes’.
‘You should be conscious of the risks involved […] and fully research the specific project if you are thinking about buying digital tokens,’ the watchdog said.
‘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.’
ICOs usually only provide a ‘white paper’, which provides different information, from what the project is about, to how much money is needed,
What is Bitcoin?
Bitcoins are lines of computer code that are digitally signed each time they travel from one owner to the next.
They are the basic unit of a new online economy which runs independently of any company, bank, or government.
Because bitcoins allow people to trade money without a third party getting involved, they have become popular with libertarians as well as technophiles, speculators — and criminals. Read more here.
But the FCA said the information provided may often be ‘inadequate’: ‘An ICO white paper might be unbalanced, incomplete or misleading. A sophisticated technical understanding is needed to fully understand the tokens’ characteristics and risks’, it added.
ICOs have grown in popularity along with cryptocurrencies, which are challenging central banks’ power over currencies, as they totally circumvent their authority.
While traditional currencies are typically regulated in value and/or quantity by central banks, cryptocurrencies such as Bitcoin are a virtual currency that is free from government interference and can be shared instantly online.
The underlying technology of both Bitcoin is blockchain, a financial ledger maintained by a network of computers that can track the movement of any asset without the need for a central regulator.
Blockchain technology is also what Ether and the Ethereum network are built on, however, while Bitcoin is the use of blockchain for just one thing – a digital currency – Ethereum runs the code of any decentralized application.
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