Risks and Hype Make ICOs a “Dangerous Cocktail”: Dutch Regulatory Authority

Netherlands’ financial authority warns investors to approach ICOs with caution.

The Dutch Financial Markets Authority (AFM), the financial authority of the Netherlands, has urged investors to refrain from investing in Initial Coin Offerings (ICOs).

A new method for crowd funding that has caught on quickly, ICOs allow start-ups to raise massive funding amounts in short spans of time for the development of certain projects and services. ICOs involve companies offering investors digital tokens in exchange for cryptocurrencies, but the downsides include lack of regulation and volatility. So far this year, ICOs have raised more than a staggering $3 billion in funding. However, they have also proven to be susceptible to scams, frauds, and hacks.

In a statement issued on their official website, the AFM stated:

“The issue of digital tokens in order to fund start-ups is currently vulnerable to deception, scams, and manipulation. The current hype surrounding cryptocurrencies and ICOs can blind investors to these risks … As a result of these risks, investors face a very high risk of losing their full investment. Against this background, the AFM currently recommends consumers not to invest in ICOs.”

The advisory goes on to pinpoint a variety of risks associated with investing in ICOs:

  • The anonymity and cross-border qualities of DLT can allow scammers to build technologically-advanced pyramid schemes, which are not immediately identifiable as scams.
  • ICOs are currently outside the scope of financial supervision, and there is no protective legislation in place for investors should something go awry.
  • The returns are not always certain, and are usually grossly over-estimated, although projects are usually in an early stage of development when ICOs are held.
  • The companies behind ICOs are not full transparent in disclosing full details, which makes it hard to assess the true value of a project, and distinguish genuine ICOs from scams.
  • Private investors often lack the necessary knowledge and expertise required to conduct an accurate risk assessment before diving in.
  • ICOs are surrounded by hype and the tokens they offer have speculative features, rendering their prices volatile and vulnerable to manipulation.
  • The anonymity of the entire procedure makes it an ideal vehicle for money laundering.

The AFM’s advisory was published the same day the European Securities and Markets Authority (ESMA) issued a press release highlighting the risks of ICOs for both investors and firms. The AFM Chairman, Merel van Vroonhoven, noted that while blockchain technology has enormous potential for the finance sector, it is not suitable for private investors, owing to the risks and hype involved.

“Although the AFM sees the possibilities of the blockchain technology to be used in financial services, it [also] points to the high risks of ICOs amidst the current hype. The high risk of scams and investment loss combined with the hype around ICOs currently is a dangerous cocktail.” 

In addition to China and South Korea’s hardline stance on initial coin offerings (both countries have banned ICOs), various regulatory bodies around the world have warned investors to be vigilant in regards to ICOs, among them the United States’ SEC and Germany’s BaFin.