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European regulator adds to warnings on virtual currencies

European regulator adds to warnings on virtual currencies

The European regulator has echoed the concerns its British counterpart on the growth of cryptocurrencies and so-called initial coin offerings.

The European Securities and Markets Authority has expressed concerns that investors are unaware of the high risks they are taking when investing in ICOs.

An ICO is a way of raising money from investors using virtual coins or tokens where these are issued and put for sale in exchange for fiat money for other virtual currencies such as Bitcoin or Ether.

Currently a single Bitcoin is trading at a price of £4,897, after rapidly accelerating in price since the start of the year.

The regulator also expressed concerns that firms involved in ICOs may be conducting their activities without complying with European Union legislation.

In a statement this morning, ESMA said investors risk losing all their invested capital if they invest in ICOs, adding that some of these coins had “no tangible value”.

It said: “The price of the coin or token is typically extremely volatile and investors may not be able to redeem them for a prolonged period.

“Another key risk stems from the fact that, depending on how they are structured, ICOs may fall outside of the scope of EU laws and regulations, in which case investors cannot benefit from the protection that these laws and regulations provide.”

ESMA added that ICOs are vulnerable to fraud and money laundering.

It added that where ICOs qualify as financial instruments, it is likely the firms involved are conducting a regulated activity meaning they would have to comply with rules such as Mifid, the Prospectus Directive and the Alternative Investment Fund Managers Directive.

Firms involved in ICOs should give “careful consideration” to whether their activities are regulated, ESMA said, adding that any failure to comply with the rules will be considered a breach.

In September the Financial Conduct Authority warned investors they should be prepared to lose all their money if they invested in ICOs.

In its warning the FCA said ICOs are “very high-risk, speculative investments”.

This move by the FCA and ESMA follows a decision by the People’s Bank of China in September which made the use of ICOs illegal.

damian.fantato@ft.com