European Securities and Markets Authority (ESMA) issued two same-day warnings concerning initial coin offerings (ICO) on 13 November after the preceding weekend was witness to dramatic swings in prices and volatility. One release is geared toward investors and the other is aimed at participating firms.
ESMA Warns ICO Investors
In what might be taken as a response to a rollercoaster weekend for cryptocurrency markets, where bitcoin cash traded places with ethereum, and bitcoin shed billions, ESMA has issued two same-day statements regarding ICOs.
Dated 13 November 2017, ESMA50-157-829 focuses its attention on investors. “If you are considering investing in ICOs or have already done so, be aware of the many risks this may entail,” ESMA begins, “including the total loss of your investment. In particular, be aware that you will have no protection,” they note.
ICOs are indeed largely unregulated in the traditional sense, having gained great traction this year as at least a tail in the price-comet that is bitcoin.
“ESMA has observed a rapid growth,” they write, “and is concerned that investors may not realise the high risks that they are taking.” “ICOs are highly speculative investments,” and “depending on how they are structured, may fall outside of the regulated space, in which case investors do not benefit from the protection,” they reiterate.
The regulatory arm is one of the three European Supervisory Authorities within the European System of Financial Supervisors bureaucracy.
They continue, “ICOs are also vulnerable to fraud or illicit activities, owing to their anonymity and their capacity to raise large amounts of money in a short
timeframe.” Risks include the above along with money laundering, losing one’s entire capital, lack of exit options and price volatility, inadequate access to information, and fundamental flaws in early, untested technologies, the body urges.
“Virtually anyone who has access to the Internet can participate in an ICO,” they point out.
ESMA Warns Participating ICO Firms
ESMA50-157-828 is decidedly more stern in its tone. Issued the same day, it urges firms “to meet relevant regulatory requirements.” In a cat-and-mouse, near Orwellian turn of phrase, they argue, “If their activities constitute a regulated activity, firms have to comply with the relevant legislation and any failure to comply with the applicable rules would constitute a breach.”
This might be very difficult for firms to ascertain, especially when the very same body refers to them as “unregulated.” Keen readers might ask, are such offerings regulated or not?
Some clarification might be had in the following: “where the coins or tokens qualify as
financial instruments it is likely that the firms involved in ICOs conduct regulated investment activities, such as placing, dealing in or advising on financial instruments or managing or marketing collective investment schemes,” the body details. These too seem rather broad and vague.
The memorandum then sets out some basic guidelines for firms. A prospectus is urged among start-ups in the field, containing “necessary information which is material to an investor for making an informed assessment of the facts and that the information shall be presented in an easily analysable and comprehensible form,” ESMA advises.
It continues in this manner, imploring firms to also be transparent in their organizational dealings and structure along with complying with anti-money laundering regulations. “Firms have an obligation to report any suspicious activity and to co-operate with any investigations by relevant public authorities,” they say.
What do you think of ESMA’s warnings? Tell us in the comments below!
Images courtesy of: Pixabay, Balint Porneczi, ESMA.
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Author: C. Edward Kelso