Why were ICOs not possible before?
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The term Initial Coin Offering is based on the term Initial Public Offering (IPO), i.e. an IPO. The conceptual proximity creates the impression that ICOs are comparable to share issues, which is neither technically nor legally the case.
The tokens acquired as part of ICOs are often subject to large price fluctuations. There is the risk of a non-liquid or non-existent secondary market on which investors can resell the tokens they have acquired in order to get out of the investment at a profit.
Typically, projects that are financed through ICOs are at a very early, mostly experimental stage, so that the development and business model are accordingly untested. At the same time, the functionalities of the respective tokens claimed in the accompanying “whitepapers” or terms and conditions are difficult to check from an investor's point of view using the underlying programming code (smart contract). The code can also prove to be vulnerable and therefore manipulable.
In addition, the information provided by the providers is often inadequate: In contrast to regulated prospectuses, the documentation in the whitepapers and contractual conditions is often objectively inadequate, incomprehensible or even misleading. Due to the lack of legal requirements and transparency regulations, the consumer is on his own when it comes to checking the identity, seriousness and creditworthiness of the token provider and understanding and evaluating the investment offered. The protection of personal data according to German standards is also not guaranteed.
The system-related susceptibility of ICOs to fraud, money laundering and terrorist financing increases the risk that investors will lose the capital invested, also due to necessary measures by the authorities against operators or other persons and companies involved in such illegal transactions.
Notes for consumers
Before consumers decide on an ICO, they should therefore make sure that they fully understand the benefits and risks of the project or investment. To do this, they should ask the issuer as many questions as necessary and verify their information from independent sources. In addition, investors should ensure that the characteristics of the project or investment match their investment needs and risk appetite. BaFin has published a specialist article on ICOs and their risks. Further information on blockchain technology and virtual currencies can be found under the menu item Entrepreneurs and Fintechs.
In addition, the websites of numerous other national supervisory authorities and the European Securities and Markets Authority ESMA also contain information and warnings on the subject.
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