European Regulator Is the Latest to Warn On ICOs

European Regulator Is the Latest to Warn On ICOs

European Regulator Is the Latest to Warn On Initial Coin Offerings

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ESMA, European Union Regulator is perhaps the latest body to warn about the issues of running ICOs and buying into the crypto-coin tool that has been successful in the recent past to take advantage of the area between issuing a securities sale and software presale sales.

This has also greatly contributed to a boost on some cryptocurrencies. As customers rush to speculate on the growth of new technologies, the initial coin offerings which involve issuing of digital tokens in exchange for cryptocurrencies have really increased in popularity.

For some months now the regulatory body has been keen in scrutinizing the ICOs. As matter of fact, the government of China issued a complete ban in September. Today, there were two statements issued by ESMA. One, on the rules for companies involved in ICOs and the other one on the kind of risks involved. It’s believed that the concerned investors might not be aware of the kind of problems that they are facing when they invest in these products. More so, firms involved may carry on their activities without following the relevant legislation put across by the EU.

According to the European Securities and Markets Authority, very highly speculative and risky nature of the ICOs means that investors might lose all the capital invested. ESMA also claims that some ICOs were not regulated hence investor protections could not be guaranteed. ICOs are also prone to illicit and fraudulent activities including money laundering among others. Although this is the first time they are sounding the warning, the increasing growth of the instruments has attracted warnings from a number of regulators.

In September, the watchdog also published a similar statement taking aim at the instruments.

ESMA also summarized some of the main risks as follows:

  • Vulnerable to fraud, unregulated space and illicit activities. This means that some of them might be involved in money frauds and money laundering activities.
  • Lack of enough information. In most instances, they are incomplete, unaudited, misleading, or even unbalanced.
  • Some mistakes in the technology which means blockchain tech has not been tested enough hence may be prone to hacking and flaws and may be unreliable.
  • There is also high chance of losing all the invested capital. This is because most of them are launched by businesses that are still at infant stages of development.
  • Extreme price volatility and not having exit options may also raise potential difficulties of cashing them out.

According to a statement issued by ESMA, they need to carefully consider whether the activities are regulated, saying that some of the sales may be required to follow the existing laws.

Based on the way they are structured, ICOs may not fall within the existing rules. However, instances where the tokens or the coins qualify, the firms should conduct regulated investments. They may also be involved in providing securities to the public.

Some of the rules that should apply in case an ICOs constitutes include

  • Fourth Anti Money Laundering Directive.
  • Alternative Investment Managers Directive.· The Markets Instrument Directive.
  • The Prospectus Directive.

Firms that are involved should also carefully consider whether the activities are regulated or not. If so, they should follow the relevant legislation and if not they will constitute a breach. It’s also the work of the firms to consider a regulatory framework that seeks the required permissions and meeting the requirements needed.