The UK's financial regulator the FCA has warned of Initial Coin Offering risks

Lynsey Barber
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Red alert for wannabe ICO investors (Source: Getty)

The UK's financial regulator has sounded the alarm on Initial Coin Offerings (ICOs), the newest trend in cryptocurrencies which has seen more than $1bn raised to date.

The Financial Conduct Authority (FCA) today warned consumers they are "very high-risk, speculative investments" and only for experienced investors "prepared to lose your entire stake".

It warned investors on several points, including that the space is completely unregulated, has no protection for investors and is subject to volatility in prices.

Read more: ICOh-no: China's the first country to ban initial coin offerings

Many companies are turning to ICOs to raise cash. They issue a digital token which can offer investors things such as equity or access to the service the company is creating.

The FCA also warned of the potential for fraud, the lack of documentation in the form of traditional prospectuses and the early nature of the startups.

"Instead of a regulated prospectus, ICOs usually only provide a ‘white paper’," it said.

"An ICO white paper might be unbalanced, incomplete or misleading. A sophisticated technical understanding is needed to fully understand the tokens’ characteristics and risks."

It signalled investors would not necessarily have any clear recourse with the FCA as it would be assessed on a "case-by-case basis".

Read more: Estonia could be the first country to do its own initial coin offering

And it also warned startups pursuing ICOs that they could fall foul of current laws and raised the prospect of cryptocurrency exchanges also being bound by such rules by facilitating the exchange of the tokens..

"Each promoter needs to consider whether their activities amount to regulated activities under the relevant law. In addition, digital currency exchanges that facilitate the exchange of certain tokens should consider if they need to be authorised by the FCA to be able to deliver their services," the advice said.

The guidance follows action by regulators in China to crackdown on ICOs.

Read the FCA's advice in full.

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