On November 11, Germany’s Federal Financial Supervisory Authority (BaFin) issued a warning about the numerous risks posed by Initial Coin Offerings (ICOs) and warned citizens that they might lose total investment by participating in ICOs.
Smoke & Mirrors
Despite the recent hype, however, very few of them are real. Here’s a fact: On December 15, more than 35 ICO’s will become active. Most of the investors in ICOs are looking for a story similar to Bitcoin riches to repeat, but don’t have technical experience or the will to study the specifics of the industry and ICO in which they are investing.
Since the industry is very lucrative, some ICOs have leveraged their economic forces to manipulate gullible investors into thinking they are becoming part of something big. In most cases, they are investing in a non-functional, concept-only startup.
In a notice published, BaFin noted:
“ICOs are a highly speculative form of investment. Investors should, therefore, be prepared for the possibility of losing their investment completely. As is the case with most new trends, the high level of public interest in ICOs is also attracting fraudsters.”
Various risks noted by the authority included the absence of secondary markets where the investor can sell the tokens acquired to liquidate the investment, untested business models, non-existent products, unsecure code and low accountability.
The word ICO stems from IPO which stands for Initial Public Offering. IPOs are what companies have been using since decades to sell shares of the company, raising funds, and passing partial ownership to investors. Owning shares means partial ownership of the company as well.
However, people must note that ICOs are different from IPOs and are not comparable from a legal or technical standpoint. Tezos in their agreement, for instance, mentioned that purchases of tokens would be a donation, to save themselves from the legal trouble.
Each continent that ICOs touch garners slightly different regulatory responses. In the United States, the SEC has warned both investors and ICOs of the volatility and insecurity of this form of fundraising.
As of now, authorities in China and South Korea have issued a blanket ban on ICOs, preventing all capital raising. Other governments like Australia, Thailand, Abu Dhabi have been more accepting.