CMVM warns investors on Initial Coin Offerings (ICOs)
3 November 2017
What are Initial
Coin Offerings?
An ICO refers to
a form of raising public funds via the internet using a virtual/digital
currency or crypto currency. An ICO may also be a sale of tokens or of virtual
currencies. The issuers of ICOs accept a crypto currency, i.e. bitcoin, ether
or official currency, such as the Euro or USD dollar in exchange for a new
currency or token which in turn is related to a company or a specific project.
What are the
associated risks?
Unregulated
activity: due to the way
in which said are structured, the clear majority of ICOs are not regulated
which entails the possibility of falling outside the regulated space. Albeit,
each actual case requires analysis (as per the circumstances and regardless of
the terminology used) so one may determine whether the instruments are covered
or not by the mentioned regulation.
Due to the fact
that ICOs are not covered by regulation, investors are left unprotected.
Price Volatility/Lack
of Liquidity: the value of a token is
prone to high volatility and may be subject to significant market change.
Tokens may lack liquidity and investors may not be able to transact said.
Potential Fraud/Money
Laundering: some issuers may direct raised funds towards other
purposes other than those disclosed during marketing.
Inadequate Information: Instead of a prospectus, the ICOs usually merely
provides a ‘White Paper’ – said may have unbalanced, incomplete, unclear and
non-explanatory information. Thus, sophisticated technical knowledge is required
in order to understand the characteristics and risks of crypto currency or
tokens.
Initial Stage
Projects: projects financed via ICOs are generally in the
initial stage of development and their business models are usually
experimental.
High risk of
entire loss of invested capital: capital
invested in an ICO is not guaranteed thus the entire loss of the invested
capital may occur. The risks linked to the investment may not be mentioned in
the documents.
Information issued by ESMA as
at 13 November 2017:
