The trend for raising cash for startups via an ICO, or token sale, is booming, though there is little test yet of their success, or what rules they fall under.
Europe's top markets regulator said that these were unregulated and experimental, and warned of pitfalls in investing in such online crowdfunding, particularly by startups.
These coins are then traded for traditional currencies, like the euro or the dollar, or other virtual currencies like bitcoin or ether. ICOs are used to raise funds for a variety of projects, including but not limited to businesses leveraging on the blockchain or distributed ledger technology (DLT).
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".
In its warning the FCA said ICOs are "very high-risk, speculative investments". ESMA also signalled that some ICOs could fall outside of European Union laws and regulations leaving investors without protections they might otherwise expect.
The second statement by market observers emphasized that startups or open-source projects participated in ICOs at risk of running regulated investment activities, not complying with applicable European Union legislation, including its emission prospectus directive, the fourth anti-money laundering directive and other laws. Fraud and money laundering were also a risk possibly involved in ICOs.
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.