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German BaFin: ICO vulnerable to fraud

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The largest economy of the European Union finally reacted to the booming ICO in the world. The Federal Office of Financial Supervision of Germany (BaFin) warned investors about the risks associated with participation in the ICO, as this is a "very speculative form of investment." The financial regulator in its statement urged investors to be cautious about the risks and be prepared for a complete loss of money, as a high level of public interest in ICO attracts scammers.


The management noted that the apparent similarity of the terms "initial placement of tokens" and "initial public offering (IPO)" creates the false impression that the ICO is the same as the issue of shares, but neither from a legal, nor from a technical point of view, they do not correspond in any way .

BaFin believes that the main risks associated with participation in the ICO are the difficulty of assessing the project's prospects for a technically unprepared investor, the lack of protection of personal data, significant fluctuations in the prices of tokens, the absence of a secondary market, and insufficient or deliberately false information declared by the issuer.

"Tokens acquired in an ICO often experience significant price fluctuations. There is a risk of there being no liquid secondary market or no secondary market at all where the investor can sell the tokens acquired in order to liquidate the investment at a profit.

Typically, projects financed using ICOs are still in their very early, in most cases experimental, stages and therefore their performance and business models have never been tested. Additionally, 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.

Furthermore, the information stated by providers is often insufficient: in contrast to regulated prospectuses, the documentation provided by the white papers and terms and conditions is often objectively insufficient, incomprehensible or even misleading. 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. It can also not be guaranteed that personal data will be protected in accordance with German standards.

The systemic vulnerability of ICOs to fraud, money laundering and terrorist financing increases the risk of investors losing the sums invested, all the more so due to the possibility of authorities taking necessary measures against operators or other persons or enterprises that are involved in such illegal dealings." - said in a statement.

At the moment, the management has not announced any regulatory measures in respect of the ICO and has promised to publish a new statement on November 15 with more detailed information. While the participation of the regulator is limited to verbal warnings.
"Before deciding to participate in the ICO, you need to fully verify the benefits of the project or investments, and take into account all the risks associated with it," warns BaFin investors.


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