Bitcoin investors could lose all their money, FCA warns

UK financial watchdog spells out risk for those participating in initial coin offerings using cryptocurrencies

The financial regulator has issued a stern warning against a speculative frenzy over initial coin offerings (ICOs) in cryptocurrencies such as bitcoin that have been promoted by celebrities including Paris Hilton.

The Financial Conduct Authority said anyone investing in ICOs should be prepared to lose all their money, with some of the schemes floated potentially outright frauds.

ICOs use the language of conventional initial public offerings (IPOs) and are designed to raise money for internet-based startups. But their similarities with IPOs end there.

Instead of raising funds from the public in sterling, euros or dollars, investors in ICOs pay in cryptocurrencies such as bitcoin and ether. In return, they are issued with a “coin” or “token” that is in effect their share in the firm.

ICOs have become popular enough for celebrities including Hilton and Floyd Mayweather to jump on board. Last week the hotel heiress tweeted her 16 million followers that she was investing in something called LydianCoin that aimed to raise $100m (£75m).

In recent months it is believed as much as £1bn may have poured into ICOs, with China the centre of speculative activity. But following a crackdown by regulators around the world, bitcoin values have slumped, with the price plummeting from $4,950 at the start of September to below $4,300, although it remains substantially up on the year.

“ICOs are very high-risk, speculative investments,” said the FCA. “You should be conscious of the risks involved … and prepared to lose your entire stake.”

In a long list of warnings, the regulator said ICOs were almost completely unregulated, offered no investor protection, were subject to extreme price volatility, and had the potential for fraud. It added that the prospectuses for ICOs, often called white papers, “might be unbalanced, incomplete or misleading”.

The FCA’s warning follows similar action by regulators around the world. Last week the People’s Bank of China banned ICO fundraising and the launch of digital currencies, saying the practice constituted illegal fundraising.

ICO trading has been most frenzied in Beijing and Shanghai, with 65 ICOs launched during the year, raising about £300m from 105,000 investors, according to the state-run news agency Xinhua.

Investors in ICOs make money when the value of their coins goes up, and following the huge gains in bitcoin – up sixfold since January despite recent falls – and another cryptocurrency, called ethereum (which has gone from $12 to $308), a lot of investors have been prepared to speculate.

Ethereum itself was launched with a sale that netted 31,591 bitcoin (then around $18.5m) in exchange for its first 60m ether tokens.

It was followed by at least 10 other ICOs run on ethereum alone, including the Basic Attention Token used for tracking-free advertising on the Brave adblocking browser ($35m raised), the MobileGo token used in a cryptocurrency-based video game marketplace ($26m raised), and the Bancor Network Token, which backs a platform designed to make it easier for users to make and launch their own blockchain tokens ($152.3m raised).

The most notorious failure to date has been a startup called the Decentralised Autonomous Organisation – DAO – which sold itself as a crowdsourced hedge fund. It lost about $150m of investors’ money, after a vulnerability in the code was discovered which allowed funds to be siphoned off by an anonymous attacker.

Contributor

Patrick Collinson

The GuardianTramp

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