UK's Financial Watchdog Releases Warning of ICO Risks

The UK's Financial Conduct Authority (FCA) issued a statement today, warning consumers about the potential risks associated with initial coin offerings.

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.

"A sophisticated technical understanding is needed to fully understand the tokens' characteristics and risks", the FCA said.

2017 has seen a boom in ICOs, where early stage startups issue new digital currencies in exchange for real money that can be used to fund projects. "There is a good chance of losing your whole stake". In detailing the primary risk it sees as inherent in ICOs, the FCA warned most projects are not regulated and are based overseas.

Initial coin offering issuers accept a cryptocurrency, like Bitcoin or Ether, in exchange for another one related to a specific firm or project.

However, the regulator conceded there could be some ICO cases which fall within the bounds of its jurisdiction, like those which involve regulated firms or investments or if a token can be construed as a transferrable security.

"Each promoter needs to consider whether their activities amount to regulated activities under the relevant law", it said. "In addition, digital currency exchanges that facilitate the exchange of certain tokens should consider if they need to be authorised by the FCA to be able to deliver their services". Over $1.5 billion has been raised through ICOs so far this year. The regulator notes some ICOs feature parallels with IPOs, private placements, crowdfunding and even collective investment schemes. As a result, investors are "extremely unlikely" to have the safety net of United Kingdom regulatory protections. The list of active, upcoming and recent ICOs on the website "ICO alert" covers 31 pages of A4 paper and includes around 600 companies.