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FCA issues total loss warning on Bitcoin boom

13 September 2017

A United Kingdom regulator has issued a warning about Initial Coin Offerings (ICOs), branding them "very high-risk, speculative investments".

It said: "You should be conscious of the risks involved ... and fully research the specific project if you are thinking about buying digital tokens".

Last week, the People's Bank of China banned blockchain startups raising funds via ICOs. With this method, which is also known as "digital coin/token sale", a company or an individual issues a proprietary token and sells it for cryptocurrency like Bitcoin (BTC) or Ethereum (ETH).

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Most ICOs are not regulated by the FCA and many are based overseas and might not intend to use the funds raised in the way set out in marketing brochures, the watchdog said.

In April the FCA launched a discussion paper on distributed ledger technology and will publish results at the end of the year, once it has assessed feedback. The FCA did not provide much in the way of its own views about how existing regulation is engaged by ICOs, but did state that ICOs could "fall into the regulatory perimeter" depending on "how they are structured". Some ICOs feature parallels with Initial Public Offerings (IPOs), private placement of securities, crowdfunding or even collective investment schemes.

In a warning to businesses involved with an ICO, the FCA warns that they must consider whether their activities amount to regulated activities.

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The FCA said the digital token may represent a share in a firm, a prepayment voucher for future services or it may have no discernible value at all.

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.

Given that many ICO tethered projects are in a very early stage of development and involve "experimental business models", the regulator stressed there is a high probability of investors losing their entire stake, one of the reasons only experienced investors should engage in this kind of digital fundraising.

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FCA issues total loss warning on Bitcoin boom