Be wary of Initial Coin Offerings (ICOs)

Press release
Virtual currencies: the Bitcoin symbol on a green background with figures

Anyone who invests in Initial Coin Offerings (ICOs) should bear in mind the associated risks. In a Communication, the Financial Services and Markets Authority draws attention to these risks and to signs that can indicate possible fraud. The European Securities and Markets Authority (ESMA) has likewise published statements on the matter.

This year, start-ups have already raised more than 3 billion dollars in financing worldwide by the sale of digital tokens (Initial Coin Offerings or ICOs). Developers of a project promote these tokens among the public via a website in order to finance their project. The tokens must generally be paid for with a virtual currency, such as Bitcoin or Ether.

Depending on how the ICO is structured, certain financial regulations may apply. But many ICOs are not subject to any legislation and so for the moment lie outside of any supervision. Anyone who participates in an ICO should therefore be aware that there may be no rules governing it and no consumer protection.

The information available on an ICO is often no more than a summary, making it difficult to estimate the risks involved. Moreover, the financing of start-ups is by definition risky, and so there is a likelihood of losing the capital invested. Yet the hype concerning ICOs and virtual currencies can lead to speculative behaviour with only very little attention to the underlying project and its risks.

Some ICOs are set up in order to defraud investors. Signs that may help identify potentially dubious ICOs include the provision of very limited information and the setting of unrealistic objectives. Where there is a great deal of hype, for example with a very short sales period, pushy advertisements or promotion by a celebrity, caution is especially advisable. Anyone who has suspicions of a dubious ICO should feel free to report it to the FSMA.

Please read the full communications by the FSMA and ESMA.