On September 12, 2017, the United Kingdom’s Financial Conduct Authority issued a warning to consumers about the risks associated with investing in token offerings (ICOs). The independent financial regulatory body cautioned that “ICOs are very high-risk, speculative investments,” recognizing that many projects are still in their infancy when they initiate token offerings. In July 2017, the US Securities and Exchange Commission posted an investor bulletin that also warned about initial coin offerings. Other regulators that have recently issued warnings or guidance include the People’s Bank of China, the Monetary Authority of Singapore, and the Canadian Securities Administrators.
Like other regulators, the FCA encouraged due diligence, telling consumers to “fully research the specific project if you are thinking about buying digital tokens” and be “prepared to lose your entire stake.” The FCA also delineated six specific risks associated with such investments:
- Unregulated space
- No investor protection
- Price volatility
- Potential for fraud
- Inadequate documentation
- Early stage projects
More specifically, “Whether an ICO falls within the FCA’s regulatory boundaries or not can only be decided case by case.” The regulator noted it’s “extremely unlikely” that investors will have protections like those afforded by the Financial Services Compensation Scheme. The FCA also expressed concerns about the lack of disclosure by ICO businesses. In essence, a white paper is not a standardized document that must pass regulatory scrutiny, so why is it sufficient to solicit millions of dollars of investment?
The best indication of the FCA’s forward-looking strategy is its request that consumers report suspicious ICOs via an online form. This might allow the regulator to gather information and determine what avenues it has for legal recourse against malevolent actors. It’s also worth noting that the FCA has encouraged the study of distributed ledger technologies, and published a discussion paper on the subject in April 2017.