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Beware 'wild wild west' of initial coin offerings, stock exchange execs say

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Beware 'wild wild west' of initial coin offerings, stock exchange execs say

Investors could face potential harm in the "the wild wild west" of initial coin offerings and cryptocurrencies, said Thomas Wittman, Nasdaq Inc.'s executive vice president and head of global trading and market services.

"Initial coin offerings and the whole cryptocurrency space is super unregulated," said Wittman, who is also CEO of Nasdaq Stock Exchange, at an Oct. 10 conference hosted by the Georgetown Center for Financial Markets and Policy. "There are going to be a lot of millennials hurt."

Initial coin offerings, or ICOs, have become a common crowdfunding tool used by companies and startups to raise capital. Built on distributed ledger technology, such as ether or blockchain, ICOs provide investors with a virtual security known as a token, which does not provide equity in the company but instead offers access to the company's service.

But investors should be wary of the offerings, said Thomas Farley, president of Intercontinental Exchange Inc.-owned New York Stock Exchange, at the same Oct. 10 conference. Farley outlined a hypothetical scenario in which a company's token could promise access to an airplane being built by the company undertaking the ICO. He warned that because companies' missions change, there is no guarantee the plane would ever be built, leaving investors behind.

"It's going to end in tears for most investors," he said.

Nasdaq's Wittman said the idea behind ICOs is "interesting," but the space is in need of advanced regulation, technology and governance.

Wittman and Farley join a growing list of observers and lawmakers to express concern over the lacking regulation of ICOs. Some countries, including China, have ruled that ICOs are illegal. In July, the Securities and Exchange Commission determined that ICOs are subject to securities laws.

But a month later, the regulator warned investors of the potential risks of ICOs and digital currencies, adding that the offerings could be used to manipulate a company's stock price.

"Fraudsters often try to use the lure of new and emerging technologies to convince potential victims to invest their money in scams," the SEC wrote in its August report.