The Cayman Islands Monetary Authority has issued an advisory on the potential risks of investments in initial coin offerings, or ICOs, and all forms of virtual currency.
ICOs are a form of fundraising in which a startup company creates new virtual coins or tokens and sells them to the public to raise capital.
Customers should thoroughly research virtual currencies, digital coins and tokens, and the companies or entities behind them to separate fiction from fact, Cayman’s financial regulator said.
While the recent publicity surrounding virtual currencies – such as Bitcoin or Ripple – and initial coin offerings presents a tempting picture of high returns on investment, they also have a high potential for financial loss and fraud, CIMA advised.
Unlike a share offering, ICOs do not provide any ownership rights in the company, nor are they a loan to the company. In addition, ICOs are frequently unregulated and tend to involve complex, new technologies and products.
Moreover, if regulators consider an ICO in breach of local securities laws, the value and usability of the sold coins or tokens could be severely impaired.
As a result, investors can lose some or all of the money they invest, CIMA noted.
Other risks associated with ICOs and virtual currencies highlighted by CIMA are the potential for incomplete information, exaggerated expected returns, price volatility, limited opportunities to resell the virtual currency, hacking attacks, fraud and limited regulatory protection.
The regulator warned that there have been several documented cases internationally where the money raised through an ICO disappeared without a trace. Tracking the funds is made difficult when fraudsters use multiple servers in different countries in combination with tools that mask the true Internet Protocol (IP) address of the users. Founders and promoters of these frauds have also operated under false names.
Investors should be aware of red flags, the regulator advised, including claims of endorsements by CIMA; limited information about the investment, the project or the development team; aggressive marketing and pushy promoters; the alleged involvement of celebrities or well-known investors with the project; and promises of quick, large returns.
“The best protection for [investors] is to only purchase virtual currencies, digital coins, or tokens that they have thoroughly researched,” CIMA said.
The regulator also reminded investors that virtual currencies are not legal tender in Cayman and that CIMA as a rule does not endorse investment products or companies.
Victims of a fraud involving virtual currencies should contact the Financial Crime Unit of the Royal Cayman Islands Police Service immediately at 649-8797. For a list of entities regulated or supervised by the Cayman Islands Monetary Authority, visit www.cima.ky.