Germany’s top financial regulator, BaFin, has raised major warnings about initial coin offerings. BaFin said in a detailed statement that it wishes to point out that the acquisition of cryptocurrency coins – also referred to as tokens, depending on their form – as part of so-called “initial coin offerings” (ICOs) may result in substantial risks for investors. ICOs are a highly speculative form of investment.
The regulator warned that 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.
The term “initial coin offering” stems from that of “initial public offering” (IPO), i.e. a floatation on a stock exchange. The apparent similarity of the terms gives the impression that ICOs are comparable to the issuance of shares – this is not the case from either a technical or legal standpoint.
Tokens acquired in an ICO often experience significant price fluctuations. There is a risk of there being no liquid secondary market or no secondary market at all where the investor can sell the tokens acquired in order to liquidate the investment at a profit.
Typically, projects financed using ICOs are still in their very early, in most cases experimental, stages and therefore their performance and business models have never been tested. Additionally, it is difficult for the investor to verify the descriptions of how the tokens function based on the underlying program code (smart contract) outlined in the accompanying white papers or terms and conditions. The code might also prove vulnerable to attack and manipulation.