Regulators in Abu Dhabi are beginning to regulate initial coin offerings (ICOs) — the rapidly growing way that cryptocurrency start-ups are raising money — but have warned of the "many risks" involved.
ICOs are a way for start-ups to raise money by issuing a new cryptocoin, while users pay them in 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.
On Monday, Abu Dhabi's Financial Services Regulatory Authority (FSRA), released guidelines on ICOs and virtual currencies for the first time.
It said that if an ICO has the characteristics of a security, such as giving a person ownership of shares in a company, then the FSRA will regulate it, similar to a company issuing new stock.
"The ICO market is incredibly diverse in terms of quality, there are some ICOs which constitute high risk," Christopher Kiew-Smith, head of fintech strategy at the FSRA, told CNBC in a phone interview. "The disclosures are not there, there are no financial statements, those are extremely high risk for those seeking returns.
"But we are aware of and are working with some firms that want to use ICO tech to fund in a transparent fashion. We have asked firms to bring them within the regulatory framework."
Under the guidelines, companies wishing to execute an ICO must approach the FSRA to see whether it will fall under the body's regulation. Companies will also have to publish a prospectus, just like a firm would for an initial public offering (IPO) on the stock market. Any market intermediaries, or secondary market operators dealing with ICOs must be approved by the FSRA.
There are, however, some ICOs that will remain unregulated. If a token issued as part of an ICO does not constitute an "offer of securities" it will remain unregulated. In such instances, the regulator said investors should exercise "extreme caution" before committing money.
"The risk of fraud and loss of capital is therefore significantly higher. This is particularly likely to be the case where a token issuer promises extremely high investment returns that are disproportionately high relative to those generally available in the market," the FSRA's guidelines state.