ESMA published a statement alerting investors about the high risks of investment in ICOs, including the risk of total loss of their investment.
ICOs are a means of raising money from the public, whereby the issuer issues coins or tokens to be purchased by investors in exchange for traditional currencies or, more often, virtual currencies such as Bitcoin or Ethereum. The coins or tokens are typically created and distributed using distributed ledger technology (DLT). In its statement to investors, ESMA cites the key risks of ICOs as: the fact that their structure may mean they are unregulated instruments; some recent ICOs have been fraudulent; ICOs are often used by start-ups with an inherent risk of failure, meaning a high risk of loss of invested capital; it may not be possible to trade the coins or tokens to exit the investment; there is a risk of extreme price volatility; information provided to investors can be limited; and the DLT technology underpinning ICOs is largely untested and may therefore potentially contain flaws.
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