The warning statement published by the CSSF (the Luxembourg financial sector supervisory authority, Commission de Surveillance du Secteur Financier) summarizes the main risks of investing in ICOs for which investors have no protection bearing in mind the nature of ICOs which are unregulated highly speculative investments and which include, among others:

  • Financial loss risks: the CSSF notes that most of ICOs aim to finance projects which are in their early stage of development. In case of failure of the project, all the invested capital can be lost because of (i) the absence of intrinsic value of many tokens and, (ii) a limited negotiability of such tokens.
  • Inadequate information: the launch of ICOs is documented by “white papers” but the CSSF notes the lack of transparence of such documents. As a consequence, the risks of financial losses are increased with investors who do not have a sufficient knowledge about the ICO and who finally focus on the potential benefits but not the risks.
  • High volatility: the CSSF warns against the risk of price bubble on tokens with the arrival of many new investors in the ICOs environment.
  • Technological risks: investors are exposed to vulnerabilities of the blockchain technology which is not subject to any specific regulation, and whose vulnerabilities may be used for fraudulent or illicit activities.

The warning statement also addresses regulatory issues to firms involved in ICOs. Even if ICOs are not subject to a specific regulation, the CSSF invites such firms to carefully consider whether their activities constitute or not a regulated activity, subject to regulatory requirements. The CSSF also reminds that it is forbidden for investment firms to invest, directly or indirectly, funds of non-professional clients in ICOs. The CSSF also enhances ICOs instigators to comply with Anti-Money Laundering regulatory requirements.

The CSSF warning statement (only in French) on this subject can be found here.