The FCA has warned that investors in a cryptocurrency fundraising mechanism should be prepared to lose their entire stake as Bitcoin trades at record highs, almost quintupling year to date.
Initial Coin Offerings (ICO) raise money for a specific project or company through the issue of a physical coin in exchange for a cryptocurrency, such as Bitcoin or Ether.
But the FCA has issued a warning that these products are unregulated, vulnerable to fraud and extremely unlikely to have access to investor protections through the likes of the FSCS or the Financial Ombudsman Service.
The FCA has also warned cryptocurrencies can be extremely volatile and that ICOs are often raising funds for early-stage projects or experimental business models. “There is a good chance of losing your whole stake,” the warning says.
Bitcoin currently trades around $4,300, up 360 per cent YTD. However, Goldman Sachs Asset Management last week warned it has six to 28 times the volatility of other asset classes.
While many ICOs fall outside the regulated space, the FCA says each case needs to be assessed on a case-by-case basis with some issues involving regulated investments and firms involved in an ICO may be conducting regulated activities.
In a warning to businesses involved with an ICO, the FCA warns that they must consider whether their activities amount to regulated activities. The regulator notes some ICOs feature parallels with IPOs, private placements, crowdfunding and even collective investment schemes.
The ICO token can also be used as a voucher for future services or in some cases may offer no discernible value at all.
Bradley Rice, senior associate at law firm Ashurst, says the regulator is “at pains” to emphasise that the regulatory status of ICOs will depend on how they are structured.
“The FCA doesn’t want to inhibit technological development but it is making very clear that the line between an unregulated token offering and the marketing of a security, crowdfunding activity or even a collective investment scheme is very thin,” Rice says.
In April the FCA launched a discussion paper on distributed ledger technologyand will publish results at the end of the year, once it has assessed feedback.
The US Securities and Exchange Commission has already issued a paper on ICOs. In July it confirmed tokens sold by online organisation The Dao were in violation of federal law because it did not meet the requirements of crowdfunding.
Regulators in Singapore, China, Hong Kong and Canada have also issued notes on ICOs.