The technology underpinning bitcoin has the capacity to disrupt the financial services industry and boost the supply of capital to start-up companies, but advisers should be extremely wary of committing client capital to such ventures, the US regulator has said.
The Securities and Exchange Commision (SEC) said the technology behind bitcoin, known as blockchain, could, through initial coin offerings, offer an outlet for small businesses to raise capital, disrupting the existing banking and corporate finance sectors.
But the regulator said advisers pondering making an investment in an initial coin offering should make sure their clients know who is behind the deal, and ensure they know what the capital is being used for, with particular wariness of offers being used to help existing investors cash out of their positions.
If the crypto currency is to be stored in a 'digital wallet', advisers should ensure their clients know what happens to the assets if they lose the access 'key' to the wallet, it added.
The regulator also said advisers should ensure their clients know what the terms are for exiting the investment.
Advisers should ensure they know what legal protection they have in the event of a hack or fraud, and whether the offering has been structured to comply with regulations, the SEC said.
A single bitcoin is currently valued at £13,039 ($17,500). At the start of the year it was worth just around £750.
In September the rapid rise in bitcoin's value led the vice-president of the European Central Bank Vitor Constancio to compare it to the "tulipmania" of the 17th century, generally considered the first speculative bubble.
Meanwhile Jamie Dimon, chief executive of JP Morgan has called the virtual currency a fraud and said those who invest in it are "stupid".
The Financial Conduct Authority and the European Securities and Markets Authority have recently warned about the increasing number of initial coin offerings, which are ways of raising money from investors using virtual coins or tokens such as bitcoin, where these are issued and put for sale in exchange for fiat money for other virtual currencies such as bitcoin or ether.
In its warning the FCA said ICOs are “very high-risk, speculative investments” where there is likely to be no investor protection.
Meanwhile Esma said consumers risk losing all their capital if they invest in ICOs, adding that some of these coins had “no tangible value”.
David.Thorpe@ft.com
