CryptoCoin Warning From FCA

Initial Coin Offerings Warning CryptoCoin

The UK finance regulator, the Financial Conduct Authority (FCA) has issued a consumer warning about the risks of Initial Coin Offerings (‘ICOs’) using CryptoCoins.

What are ICOs?

The term ICO refers to a digital way of raising funds from the public using a virtual currency, also known as cryptocurrency. An ICO can also be known as ‘token sale’ or ‘coin sale’.

ICO issuers accept a cryptocurrency, like Bitcoin or Ether, in exchange for a proprietary ‘coin’ or ‘token’ that is related to a specific firm or project. ICOs vary widely in design. The digital token issued may represent a share in a firm, a prepayment voucher for future services or in some cases offer no discernible value at all. Often ICO projects are in a very early stage of development.

ICOs are very high-risk, speculative investments.

You should be conscious of the risks involved (highlighted below) 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 itself (e.g. business plan, technology, people involved) and prepared to lose your entire stake.

What are the risks? 

• Unregulated space: Most ICOs are not regulated by the FCA and many are based overseas.

• No investor protection: You are extremely unlikely to have access to UK regulatory protections like the Financial Services Compensation Scheme or the Financial Ombudsman Service.

• Price volatility: Like cryptocurrencies in general, the value of a token may be extremely volatile – vulnerable to dramatic changes.

• Potential for fraud: Some issuers might not have the intention to use the funds raised in the way set out when the project was marketed.

• Inadequate documentation: Instead of a regulated prospectus, ICOs usually only provide a ‘white paper’. An ICO white paper might be unbalanced, incomplete or misleading. A sophisticated technical understanding is needed to fully understand the tokens’ characteristics and risks.

• Early stage projects: Typically ICO projects are in a very early stage of development and their business models are experimental. There is a good chance of losing your whole stake.

Comment -

18th Century Token Coins Are 'Back' - But Now In A 'Dangerous' Digital Age

Cryptocoins are nothing new, in the 18th century, many mining firms and other companies issued their own 'token' coins to employees, if money was in short supply or not easily available (e.g. metal used up for cannons, ships etc) or the government could not press coins quickly enough, companies/employers issued these tokens that where paid to employees to spend locally and the company would honour the debt when real money was in supply.

Today, we suggest cryptocoins are dangerous in themselves if you do not understand the risk.  Fundamentally, each 'cryptocoin' it is a totally unique 'string' of computer code that supposedly can exchange hands for value (and prices can be volatile).  Many use cryptocurreny to by pass traditional currencies, think of it as: if all the World was using only Dollars, or only Euros or only Sterling.  Ultimately, that is exactly what Bitcoin or Ether (another type) does - a globally transportable, border free 'currency'.

The reality is, all currencies are worthless, if you think the Bank of England has enough silver in its vaults "To Pay The Bearer On Demand The Sum Of Twenty Pounds Sterling" i.e. 20lbs in weight in little silver coins called 'sterlings' (read your History) then you are living in 'cloud cuckoo land'. 

All currencies are 'virtual' the difference is that main stream currencies are backed by a country's assets, wealth and central bank.  CryptoCurrencies do not have any such support.   Even this week, the boss of JP Morgan, Jamie Dimon, allegedly said in New York that bitcoin is a fraud and will eventually blow up.

Our view - (along with the regulator) - be careful, if you want a fast, high risk investment, then so be it, but go into it with your eyes wide open.