Germany’s Federal Financial Supervisory Authority (BaFin) has issued a warning on initial coin offerings (ICOs).

“ICOs are a highly speculative form of investment. Investors should therefore be prepared for the possibility of losing their investment completely. As is the case with most new trends, the high level of public interest in ICOs is also attracting fraudsters,” the regulator said.

BaFin also highlighted the risks related to price fluctuations and liquidity. It said that there is a risk of there being no liquid secondary market or no secondary market at all where the investor can sell these tokens.

In addition, as the projects issuing the ICO tokens are themselves at very early, often experimental stages, it is difficult for the investor to verify the descriptions of how the tokens function based on the underlying program code (smart contract) outlined in the accompanying white papers or terms and conditions. The code might also prove vulnerable to attack and manipulation.

Moreover, the information stated by providers is often insufficient and due to the lack of legal requirements and transparency rules, the consumer is left on their own when it comes to verifying the identity, reputability and credit standing of the token provider and understanding and assessing the investment on offer. BaFin also noted the systemic vulnerability of ICOs to fraud, money laundering and terrorist financing.

BaFin will publish more detailed information on ICOs and their risks in BaFinJournal on 15 November.