FCA warns on risks of ‘ICOs’

The FCA has today made a statement on Initial Coin Offerings or ‘ICOs’.

The FCA has said that ICOs, which can vary widely in design, are ‘very high-risk, speculative investments.’ They went further to say that ‘whether an ICO falls within the FCA’s regulatory boundaries or not can only be decided case by case.’

The FCA said that ‘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 risks to be considered by those looking to participate:

  • 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.

What needs to be considered by those involved?

Many ICOs will fall outside the regulated space. However, depending on how they are structured, some ICOs may involve regulated investments and firms involved in an ICO may be conducting regulated activities.

Some ICOs feature parallels with Initial Public Offerings (IPOs), private placement of securities, crowdfunding or even collective investment schemes. Some tokens may also constitute transferable securities and therefore may fall within the prospectus regime.

Businesses involved in an ICO should carefully consider if their activities could mean they are arranging, dealing or advising on regulated financial investments. Each promoter needs to consider whether their activities amount to regulated activities under the relevant law. 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.

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