Regulators in Abu Dhabi have started regulating Initial Coin Offerings (ICOs) in the country and have cautioned that they are fraught with “many risks.” ICO is a popular way for cryptocurrency start-ups to raise money.

ICOs as a way of raising money for start-ups involves issuing new crypto coin and users buy them using Ethereum or Bitcoin. Just like crowdfunding, it is a way of raising money but involves cryptocurrency. Data website estimates that start-ups have raised up to $2.4 billion from ICOs this year.

The Abu Dhabi Financial Services Regulatory Authority (FSRA) on Monday, issued guidelines on ICOs and virtual currencies for the first time.
It noted that if an ICO possessed the characteristics of a security, like issuing a person ownership of shares in a company, then FSRA will place it under regulation, just like a company issuing new stock.

Head of fintech strategy at the FSRA Christopher Kiew-Smith, told CNBC in a telephone interview that there is a high level of diversity in the IOC market when it comes to quality, with some ICOs constituting high risk. He further stated that there are no disclosures or financial statements and they are extremely high risk for people who are seeking returns.

He noted that “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.”

The guideline provides that any company which wishes to execute an ICO must approach the FSRA to ascertain whether it falls under the body’s regulation. Just like a firm for an Initial Public Offering (IPO) on the stock market, under this regulation, companies are also required to publish a prospectus. The FRSA must approve any market intermediary or secondary market operators that are dealing with ICOs.

However, there are some ICOs which will remain unregulated. Any token which when offered as part of an ICO does amount to “offer of securities” would not be regulated. When that is the case, investors are advised to tread with “extreme caution.”

The FSRA’s guidelines state that “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.”

Cryptocurrencies are not money but commodities

The Abu Dhabi financial regulators also noted that virtual currencies are not money but “commodities” which are in the same category as precious metals or fuels. They, therefore, stay unregulated.

There have been contradictory regulations from one country to the other over the past months regarding the use of cryptocurrencies and accepting them for transactions. For instance, Dubai recently planned to build its economy around blockchain and has allowed it major companies to start testing out how they can adopt blockchain in doing business.

Japan has also gone ahead to make bitcoin legal tender. Japan’s GMO recently invested $90 million in cryptocurrency mining. Besides, Japanese e-commerce giant DMM is equally considering investing money in the crypto market. The country is obviously creating an enabling environment for cryptocurrency business to thrive.

Unfortunately, the same cannot be said of China, which has already placed a ban on ICOs because they felt it wasn’t safe for their citizens. This development has seen an exodus of start-ups going to launch their ICOs in Japan which has a friendlier environment.

The executive director of capital markets at the FSRA Wai Lum Qwok told CNBC by phone that “For us, we do see a lot of challenges in regulating something which was designed not to be regulated. We recently established a fintech reach with the Japanese FSA, and through such cooperation, we hope to see how they regulate these and if there are risks they see. We are open to carving virtual currencies into the regulated space.”

FSRA is of the opinion that ICOs could be a way for companies to transparently raise money and in less expensive manner if appropriately regulated. They went ahead to say that were trying to remove disproportionate barriers to innovations that are sensible.

Looking at the way some ICOs have been launched recently, there’s need to have some regulations to create a sane environment and minimize the way some investors are being ripped off.