Joshua Brown, a financial adviser at Ritholtz Wealth Management, has joined the chorus of observers who are warning people about investing in ICOs, which are currently expanding at a rapid pace. Brown claims in a blog on thereformedbroker.com that ICOs are where frauds are going to take place. He referenced a recent call from a broker who said someone raised mid-double digits in the millions of dollars for an ICO with no customers and a skeleton business plan.
ICO tokens are unregistered securities being sold in the form of digital coins every day, Brown claims. More than $2 billion has been raised for “hare brained schemes” through ICOs this year, he stated, and ICOs are outpacing funds raised from IPOs on stock exchanges.
There is no regulation of ICOs, unlike traditional securities, he noted. The structure of an ICO makes it fertile ground for fraud and abuse. “Anyone can promise anything and no one is overseeing it,” he wrote.
He compared the ICO tokens to tokens at Chuck E. Cheese. You put money into a machine that dispenses tokens in a plastic cup that have a value at Chuck E. Cheese only.
These tokens have no value once they are taken out of Chuck E., Cheese. When Chuck E. Cheese goes out of business, the tokens become worthless. The same scenario unfolds when an ICO does not materialize; the buyer of the token has bought an unregistered security with no chance of recouping anything.
Brown offered the example of someone selling a “WalCoin” that can be used to buy sex with walruses.
The UK’s Financial Conduct Authority recently urged investors to ‘fully research” ICOs and recommended only experienced investors to invest and buy digital tokens from an ICO project. In detailing the primary risk it sees as inherent in ICOs, the FCA warned most projects are not regulated and are based abroad. As a result, investors are “extremely unlikely” to have the safety net of U.K. regulatory protections. The potential for fraud, inadequate documentation and extreme price volatility of a digital token bought in exchange for cryptocurrencies are all listed as additional risks.
Brown also noted that bitcoin is not being used for transactions, but for buying and hoarding, and sometimes trading. The reason people are not using it to buy things is because of its demonstrated ability to appreciate in value.
Meanwhile, he claims the IRS will take further action concerning how bitcoin gains will be taxed. He noted that China has outlawed bitcoin exchanges due to concerns about money laundering.
He said the U.S. needs to be more concerned about tax evasion and fraud when it comes to bitcoin.
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