Kenya’s Capital Markets Authority (CMA) has become the latest in a long line of regulators worldwide who have issued warnings to investors, urging them to take into account the risks associated with digital token-based fundraising or investment schemes known as Initial Coin Offerings (ICO).
In a notice in the local dailies, the authority says it has not, as of this date, approved any Initial Coin Offering (ICO). The authority describes the ongoing ICOs as unregulated and speculative investments with great risk to investors.
Currently, there are two ongoing ICOs in the local market that are under heavy criticism and are seem to operate like classic pump and dump scams or pyramid schemes; Nurucoin and Uwezo coin. Uwezocoin claims to be an “open decentralized secure cryptocurrency” like Bitcoin while nurucoin claims to be a peer-to-peer Internet currency that enables instant, near-zero cost payments to anyone in the world.
According to the International Organization of Securities Commissions, which Kenya is a member, some of the risks associated with ICOs are as follows:
The heightened potential for fraud: while some ICOs are backed by genuine teams and innovative ideas for products and services, there is a risk that some are launched by fraudsters. Since ICOs are unregulated, investors risk being the victims of such frauds.
Cross-border distribution risks: If the investor is operating the ICO outside the investor’s jurisdiction, tracking the money and recovering it in the event the ICO collapses can be difficult.
Information asymmetry: the complex nature of ICOs and the uncertainty surrounding the rights and interests of investors results in most ICO participants not understanding the risks, costs, the expected returns, and the expected drivers of risks and returns emanating from their investments. As a result, they cannot make informed decisions regarding such investments and may be vulnerable to fraud.
Liquidity risks: Generally, cryptocurrencies and ICO tokens are traded on virtual exchanges which might give rise to opaque and volatile pricing and insufficient liquidity to support dependable trading and market-making activities. In some countries, these exchanges are unregulated. Therefore, investors are exposed to volatile prices and the possibility of being unable to exit their holdings.
“Members of the public are, therefore, urged to exercise caution before participating in any ICO lacking regulatory sanction. CMA is cognizant of the importance of Fintech and the benefits that can be derived from leveraging on blockchain technology and is willing to work with interested parties through the already established Sand Box model for purposes of supporting innovative Fintech products in a controlled and safe environment,” the notice concludes.
During a chat with Kenyan Wall Street, Paul Muthaura, CMA CEO said startups seeking to launch an ICO should seek approval from the authority “If they are seeking to make a public offer without clear restrictions on eligibility to participate as well as where they are not conducting any form of suitability, risk, and capacity analysis of the investors before them becoming eligible to participate in an ICO. We intend to use the Fintech Sandbox Framework to create a [facilitation] environment for unrestricted (public/retail) issuance to occur with an appropriate level of oversight.”