City watchdogs are warning speculators that initial coin offerings (ICO) are high risk and could lead to investors losing their stake.
The UK Financial Conduct Authority (FCA) says ICOs are a gamble for investors despite a boom in worldwide popularity.
The FCA is the latest regulator to issue a warning about ICOs just a few days after they were banned in China and following a similar warning from US regulators two weeks ago.
An ICO lets a start-up company swap a digital token for an online currency, such as Bitcoin or Ethereum.
The token is a pledge from the company to hand over shares, goods or services at some time in the future.
$1 billion raised in a year
The market in the US alone is estimated at more than $1 billion in the past year.
Regulators fear entrepreneurs and fraudsters are using ICOs to bypass strict controls and due diligence normally carried out by business professionals.
The underlying cryptocurrency is often subject to regular price swings that can lead to dramatic changes in value.
The Securities Exchange Commission (SEC) in the USA has concerns that some ICOs are scams aimed at manipulating a company’s share price.
In Britain, the FCA is considering regulating some ICOs and has indicated that each offering will be reviewed on a case-by-case basis.
Be aware of ICO risks
“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,” said a spokesman.
“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 and prepared to lose your entire stake.”
UK investors were also warned that ICOs fall outside of the remit of the Financial Services Compensation Scheme if they should turn sour and that the potential for fraud is high.
ICO projects are typically companies seeking to raise seed capital and have no trading history on which to base a valuation and no regulated prospectus that clearly explains what investors receive from a token.