As such, the FCA warns that these are "very high-risk, speculative investments" and as most ICO's aren't regulated, there's no protection from the Financial Services Compensation Scheme or the Financial Ombudsman Service if something goes wrong.
"ICOs are very high-risk, speculative investment", the Financial Conduct Authority (FCA) - which oversees 56,000 financial services firms and markets in the United Kingdom - said in a statement published today.
You should be conscious of the risks involved (highlighted below) and fully research the specific project if you are thinking about buying digital tokens.
ICOs have exploded in popularity this year, becoming the preferred method for raising capital by blockchain startups.
"Often, ICO projects are in a very early stage of development", it said.
The rise of ICOs has prompted a regulatory response from a number of financial authorities around the world, including those based in the US, Hong Kong, Singapore and China.
Initial coin offering issuers accept a cryptocurrency, like Bitcoin or Ether, in exchange for another one related to a specific firm or project.
The FCA said the digital token issued may represent a share in a firm, a prepayment voucher for future services or in some cases offer no discernible value at all. In detailing the primary risk it sees as inherent in ICOs, the FCA warned most projects are not regulated and are based overseas. However, it warned companies to "carefully consider if their activities could mean they are arranging, dealing or advising on regulated financial investments". "Some tokens may also constitute transferable securities and therefore may fall within the prospectus regime".
"Each promoter needs to consider whether their activities amount to regulated activities under the relevant law", it said. As a result, investors are "extremely unlikely" to have the safety net of United Kingdom regulatory protections.