The Money Laundering & Terrorist Financing Risks Associated with ICOs

Initial Coin Offering (ICO) also known as a ‘token sale’ or ‘coin sale’ is a method of fundraising in the cryptocurrency industry. Funds are raised by the sale of coins at a discounted price which bares similar resemblance to IPO’s. The ICOs are usually accompanied with a white paper which is an official document informing the investors on the product in a hope to lead them into investing.

As the cryptoasset markets are not currently regulated, ICOs have presented a money laundering and terrorist financing risks; examples include the case of Fantasy Market who were charged by the SEC for running a fraudulent ICO scheme.

In an attempt to raise $25 million by selling 125 million FMT tokens, Jonathan C. Lucas the founder of fantasy market had made a white paper with fake claims to lure investors. The white paper had claimed the value of the tokens provided would increase as the demand for the Fantasy Market platform rose and that a working-beta version of the site existed which was later found to be false.

The lack of formality involved in ICOs gives the opportunity for individuals to launder money through swapping cryptocurrency that originated from illicit financing for tokens that can be sold for fiat currency. This makes it an attractive market for money launderers and terrorist financing as the lack of regulation and government intervention has made it difficult for criminals to be identified.

Although ICOs share similar features to IPOs they do not have to go through the strict regulation set by regulators such as the UK FCA. Currently not all ICOs fall within FCA’s regulatory boundaries which is why it is decided on a case by case basis. It is usually the case that ICOs involving regulated investments and firms, Tokens that constitute transferable securities, placement of securities and crowdfunding all fall under the boundaries of the FCA regulation.