Initial coin offerings (ICOs) — one of the fastest-growing ways for cryptocurrency start-ups to raise money — are "absolute scams," Wikipedia founder Jimmy Wales told CNBC.
ICOs are a way for start-ups to raise money by issuing a new cryptocoin, while users pay them bitcoin or ethereum. It's similar to crowdfunding but with digital money. This year, start-ups have raised $2.4 billion from ICOs, according to data website Coindschedule.com
Wales however cautioned investors from participating in ICOs calling them a scam.
"I think blockchain is a super interesting technology but there are a lot of fads going on right now ... There are a lot of these initial coin offerings which are in my opinion are absolute scams and people should be very wary of things that are going on in that area," Wales told CNBC in an interview on Wednesday.
ICOs are unregulated and do not provide protection to investors in case of fraud or loss. In September the People's Bank of China declared ICO's illegal and have banned them. South Korea have since joined the backlash against ICO's and has banned them as well. The U.S. Securities Exchange Commission recently charged two companies running ICO's with fraud and selling unregistered securities.
However, Wales did say that blockchain will "be with us for some time to come."
Blockchain is the technology that underpins bitcoin. It is a distributed ledger that records all of the transactions in bitcoin publicly. Many industries from finance to insurance have talked up the potential of blockchain technology in making some of the processes they do cheaper and more efficient.
Digital currencies have gained a lot of prominence in the past year spurred by increases in investment. In August, the total market value of publicly traded cryptocurrencies reached a new high of around $160 billion according to data provider CoinMarketCap , with Bitcoin representing half of that value. This has prompted the financial world to figure out how to incorporate the new form of transacting into their own models.
Last month, the CEO of JP Morgan Jamie Dimon stated that "the currency isn't going to work" and that "it is worse than tulip bulbs" in reference to the speculative tulip bubble in the 1600's. Goldman Sachs CEO Lloyd Blankfein has taken a more lukewarm approach tweeting that he was "still thinking about bitcoin" and has not decided whether to endorse or reject the technology yet. The Wall Street Journal also reported earlier this week that Goldman Sachs may be looking to launch a bitcoin and cryptocurrency platform in coming months. This would be the first instance where a mainstream bank wades into the world of cryptocurrency trading and makes it available for outside investors.
Larry Fink, the chief executive officer of Blackrock has also weighed in saying that while he is a "believer in the potential in what cryptocurrencies can do", he thinks that the atmosphere at present is too "speculative" and also reflects "how much money laundering is being done in the world".
