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 regulatorsaround 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”.