Initial coin offerings (ICOs), the practice of creating and selling digital currencies to finance start-up projects, are "very high risk" and speculative, Britain's Financial Conduct Authority (FCA) warned on Tuesday.
ICOs are a digital form of raising funds from the public using a virtual currency, with issuers accepting Bitcoin or Ether in exchange for a proprietary coin or token that is related to a specific company or project.
"ICOs are very high-risk, speculative investments," the FCA said in a consumer warning.
"You should be conscious of the risks involved and fully research the specific project if you are thinking about buying digital tokens."
China has banned ICOs, saying it was necessary to stop illegal fundraising and pyramid schemes, news that sent Bitcoin tumbling.
The U.S. Securities and Exchange Commission issued an "investor alert" in July to make investors aware of potential risks from ICOs. In August, regulators in Singapore and Canada also cautioned investors about the sector.
The FCA said the digital token issued may represent a share in a firm, a prepayment voucher for future services or in some cases offer no discernible value at all.
"Often, ICO projects are in a very early stage of development," it said.
Most ICOs are not regulated by the FCA and many are based overseas and might not intend to use the funds raised in the way set out in marketing brochures, the watchdog said.
"Each promoter needs to consider whether their activities amount to regulated activities under the relevant law," it said.
"In addition, digital currency exchanges that facilitate the exchange of certain tokens should consider if they need to be authorized by the FCA to be able to deliver their services."