Regulator issues Initial Coin Offerings warning
THE Island’s financial services regulator is warning investors of the potential risks of relatively new digital funding structures called Initial Coin Offerings.
Like digital currency Bitcoins, ICOs use ‘blockchain’ technology. Typically, investors or participants exchange an amount of cryptocurrency for digital tokens or ‘coins’ linked to a specific business or project.
The Jersey Financial Services Commission say they are concerned that ordinary retail investors could be asked to put their funds into these ‘highly speculative and risky’ ICOs, which tend to be unregulated, with limited investor protection, volatile pricing, lack of clarity and high risk of loss. They say they are aware of some instances of ICOs being used for fraudulent purposes.
The Jersey warning follows recent concerns from a number of other countries including the UK, Canada, Germany and Singapore, with China recently banning the use of ICOs.
The JFSC statement coincides with an announcement by the UK government earlier this week of a crackdown on virtual currency Bitcoin amid rising concerns about money laundering and tax evasion. Parts of the National Health Service and other organisations were brought to a standstill earlier this year by hackers who demanded ransoms paid in Bitcoin.
The European Union is also calling for new requirements for online Bitcoin trading platforms to carry out due diligence on customers and report suspicious transactions.
Last week Bitcoin pushed past the 10,000 US dollars mark for the first time, further stoking fears of a price bubble around the cryptocurrency and raising concerns that investors are over-estimating Bitcoin’s value.
However, the head of the International Monetary Fund (IMF), Christine Lagarde, has said that that cryptocurrencies like Bitcoin could be a useful tool in the future financial system and that virtual currencies could be ‘easier and safer’ to hold than paper bills in remote regions, or in countries with unstable national currencies or ‘weak institutions’.
Ms Lagarde also urged central bankers to be ‘open to fresh ideas and new demands, as economies evolve.
Jersey was last year the one of the first jurisdictions to introduce regulations governing ‘virtual’ currencies under the Proceeds of Crime ‘Miscellaneous Amendments) regualtions, following collaboration between the States, the JFSC, Jersey Finance and Digital Jersey.
In its latest statement the JFSC says that it ‘recognises the innovative potential’ of blockchain and fintech, but is nevertheless concerned about the risks for unsophisticated investors.
The Commission also states that in some cases an ICO may require consent under the Control of Borrowing (Jersey ) Law, but even if consent is granted the Commission takes no responsibility for the financial soundness of the schemes.