This article first appeared in The Edge Financial Daily on September 8, 2017 - September 14, 2017

KUALA LUMPUR: The Securities Commission Malaysia (SC) reminds the public of the investment risks in cryptocurrency or digital token-based fundraising or investment schemes, shortly after China’s move to ban initial coin offerings (ICOs) earlier this week.

The regulator said investors should “fully understand” and “weigh the risk” of such investments.

The fundraising exercise, commonly known as ICO — a term that closely resembles initial public offering — entails investors to pay for the issuance and sale of said tokens, usually via better-known cryptocurrencies such as Bitcoin or Ethereum.

Other names for ICOs include initial token offerings, token presale and token crowd-sale, among others, said the SC in a statement yesterday.

It warned investors of the potential risks involved in ICO fundraising schemes, which can be structured in different forms.

“As the terms and features of ICO schemes may differ in each case, investors who wish to engage or invest in ICO schemes are reminded to seek legal or other professional advice if there are doubts on the legitimacy of these schemes,” the statement said.

The structures of fundraising include, among others, direct investments in projects, where token holders have rights to a project’s returns, as well as foundation-based funding where investors can enjoy rights to future products or services developed by the ICO scheme operator.

The SC said some operators have no presence in Malaysia, making it difficult to verify the authenticity of the ICO. “The recovery of invested monies may be subject to foreign laws or regulations.

“Some ICO schemes and the parties involved operate online and may not be regulated, [so] investors may be exposed to heightened risks of fraud, money laundering and terrorism financing,” it said.

The structure of these ICO schemes might also limit the legal protection and recourse for investors against scheme operators, said the SC, adding that digital tokens traded on a secondary market “may give rise to risks of insufficient liquidity or volatile and opaque pricing”.

“Investors should be aware that ICO scheme operators issue a white paper, which typically contains descriptions of the ICO scheme, but may also carry disclaimers which absolve the operators from certain responsibilities and obligations,” it said.

It is noted that there has been several Malaysia-based ICOs conducted in 2017, including the controversial EcoBit, in which the Kelantan government has had some involvement in. EcoBit was also listed on Bank Negara Malaysia’s Financial Consumer Alert.

Besides EcoBit, other ICOs based in Malaysia include HelloGold, a syariah-compliant coin backed by the value of gold, and PitisCoin, which aims to be a medium of exchange to complement the ringgit.

Earlier this week, the People’s Bank of China announced that it had completed investigations into ICOs and will strictly punish offerings in the future while penalising legal violations in the ones already completed.

The Chinese regulator had demanded those that have already raised money to provide refunds to the investors and had also imposed a ban on conversion of cryptocurrencies into fiat currencies.