Loss looms on flip side of this coin| Allen Huang 23 Jan 2019
Associate Professor, Department of Accounting, HKUST Business School
Hongkongers' enthusiasm for cryptocurrencies has been dampened when investors claimed to have been tricked by a high-profile businessman into buying mining machines for the cryptocurrency "Filecoin."
They discovered that Filecoin was not yet tradable on the market and promises of refunds were not honored.
What could investors do to reduce their investment risk then?
Since early 2017, many early stage blockchain-related investment projects have devised a funding method called initial coin offering.
They issue tokens on blockchain to investors, and unlike initial public offerings, where investors receive stocks representing part of the ownership of the issuers, these tokens only provide holders with the right to use the project's service in the future.
Therefore, the issuers claim that ICOs are not subject to securities regulation.
As there are no regulations for most ICOs, their marketing documents or "white papers" do not disclose assets or liabilities (probably because most of them have none), and there are no audited statements or investment reports written by chartered financial analysts.
In some cases, ICO issuers even feature themselves in celebrity photos, or describe their investors as donors to avoid being labeled as offering securities.
In fact, a recent study conducted by EY, one of the "Big Four" accounting firms, found that 71 percent of the ICO projects launched in 2017 failed to introduce any product to the market, failed to raise capital or refund investors.
Some even disappeared.
Furthermore, China banned ICOs in September 2017, while the US Securities and Exchange Commission has been looking more closely into both fraudulent and proper ICOs in recent months.
Before investing in ICOs, individual investors should scrutinize cautiously for unsubstantiated statements, examine their proven investment track records, beware of over-optimistic information, and ensure they understand everything they are told.
They must also consider why an ICO would like to acquire capital from individuals instead of traditional venture capital or private equity, which would provide professional guidance, sufficient funding and solid credibility.
Is it because the current regulations on ICOs are lax or even non-existent?
Given ICOs' highly risky nature, one must expect to shoulder a 90 percent if not 100 percent loss of one's investment.
Investing in ICO projects without the relevant expertise to evaluate and understand one's commitment is similar to handing over cash to a total stranger in the street who solicits money from you for an imaginary lucrative project.
Average individual investors must ask themselves if they are ready to be involved in such high-risk business endeavors.
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