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US FINRA highlights SEC ICO risks warning

Juhi Banu | Oct. 4, 2017
US FINRA highlights SEC ICO risks warning

It looks like ICOs are about to undergo a lot more scrutiny. Scepticism continues to rise as more startups begun to turn to ICOs as a fundraising mechanism. Considering the issue, the US authorities highlighted SEC ICO risks warning, which shows investors need to be wary again.

4 October, AtoZForex - As ICOs have expanded globally, it always remains caution for the US financial watchdog. The US Securities and Exchange Commission (SEC) keeps on issuing stern warnings to ICOs investors about the potential risks of the buying the coins. Moreover, initial coin offerings are the controversial method of raising capital, which has drawn the attention of SEC's regulatory body FINRA too.

Key issues highlighted by US FINRA

In addition to the warning, the authorities highlighted the issue in the following terms.

“Investing in an ICO may seem like an exciting way to be a part of the virtual currency and Blockchain startup markets, but buyers should use caution when considering these complex investments,” said Gerri Walsh, FINRA’s Senior Vice President for Investor Education.

"ICOs involve new technologies and products that are highly technical. Especially,con-artists use this technology as an opportunity to dupe investors”.

A second critical issue is that it can be unclear what the ownership of the coin purchased confers. For an IPO, the person who makes the purchase is taking ownership of a share of the company. This provides a tangible and more importantly, quantifiable stake.  A purchase of a coin via an ICO does not necessarily give the holder of the coin ownership rights. This can often be the nature of the purchase. However, the investors often simply see as a method of funding, whereby the ownership of the coin itself is the value, similar to how money works.

However, with actual currency, there is a market where the investors use the money to purchase goods. The central bank controls the amount of coins for maintaining inflation and the ongoing strength of the economy. With a crypto-coin, the decentralization of the coin is more in relation to the coin users, rather than the issuing entity.

Generally, a single entity monitored the coin, usually whichever entity that established the ICO. Unlike a central bank aims to maintain a steady control over inflation, the purpose of ICOs is to raise funds. Therefore, as long as the sale of coins has a market, the issuers will have an interest in selling them.

ICO Investment Risks

That is not necessarily the case with all cryptocurrencies, many have designed to give the coins a continued value, with Bitcoin a prime example. However, more recent issues of cryptocurrencies are not to mimic a financial system like Bitcoin, recently Goldman Sachs announced to offer Direct Bitcoin Trading.

For example, Creation of Ethereum allows ‘smart contracts’ and to effectively to create an efficient system of ownership transfer. Whilst maintaining the value of Ethereum coins is important, it is not essential. There are a few other aspects that add risk to the purchase of coins from an ICO. Many startup companies issue tokens for ICOs to help fund their own cryptocurrency software.

Moreover, some companies are not listed as a public company and they are not subject to public disclosure requirements. Since the ICOs do not confer ownership this is less of a concern, but should a company not develop the software, the tokens will be useless. Cyber-security issues should also be at the forefront of the minds of those purchasing coins. It is possible that the company has poor cybersecurity.

Concerning that, the coins are easy to steal, or worse, allow attacks on your personal information. Issues surrounding how to get your money back, what rights are conferred with the coins and how the coin issuance is structured are key elements that also neede to be investigated. In most cases, there is no requirement for an ICO to address any of these issues.

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Disclaimer: The views and opinions expressed in this article are solely those of the author and do not reflect the official policy or position of AtoZ, nor should they be attributed to AtoZMarkets.