The European Securities and Markets Authority (ESMA) warned investors about the risks of initial coin offerings (ICOs) in a statement on Monday (Nov. 13) and also issued rules for firms that become involved in them.
ESMA said it has witnessed the rapid growth of ICOs — for cryptocurrencies like Ethereum and any other blockchain-based ledger — around the globe and in Europe and is concerned that investors may not understand the risks associated with putting money into ICOs, warning of the very real possibility of losing all invested capital, since initial coin offerings are “very risky” and highly speculative.
“The price of the coin or token is typically extremely volatile, and investors may not be able to redeem them for a prolonged period. Another key risk stems from the fact that, depending on how they are structured, ICOs may fall outside of the scope of EU laws and regulations, in which case investors cannot benefit from the protection that these laws and regulations provide. ICOs are also vulnerable to the risk of fraud or money laundering,” ESMA said in the statement. “Where ICOs qualify as financial instruments, it is likely that firms involved in ICOs conduct regulated investment activities” and, as a result, “need to comply with the relevant legislation.”
ESMA also stressed that firms engaging in ICOs for cryptocurrencies like bitcoin, Ethereum or any other blockchain-based ledger should consider carefully whether their activities constitute regulated activities and that failure to comply with applicable rules will be considered a breach.
ESMA is just the latest regulatory body to issue a statement about the risks of fraud and money laundering associated with ICOs and to warn that companies launching initial coin offerings could be running afoul of established rules. Earlier this year, China banned ICOs altogether, as well as bitcoin exchanges. The U.S., U.K. and Russia are among a growing list of countries to caution investors about ICOs.