Regulators in Abu Dhabi are beginning to regulate initial coin offerings (ICOs) — the rapidly growing way that cryptocurrency start-ups are raising money — but have warned of the “many risks” involved.

ICOs are a way for start-ups to raise money by issuing a new cryptocoin, while users pay them in bitcoin or ethereum. It’s similar to crowdfunding but with digital money. This year, start-ups have raised $2.4 billion from ICOs, according to data website Coindschedule.com.

On Monday, Abu Dhabi’s Financial Services Regulatory Authority (FSRA), released guidelines on ICOs and virtual currencies for the first time.

It said that if an ICO has the characteristics of a security, such as giving a person ownership of shares in a company, then the FSRA will regulate it, similar to a company issuing new stock.

“The ICO market is incredibly diverse in terms of quality, there are some ICOs which constitute high risk,” Christopher Kiew-Smith, head of fintech strategy at the FSRA, told CNBC in a phone interview. “The disclosures are not there, there are no financial statements, those are extremely high risk for those seeking returns.

“But we are aware of and are working with some firms that want to use ICO tech to fund in a transparent fashion. We have asked firms to bring them within the regulatory framework.”

Under the guidelines, companies wishing to execute an ICO must approach the FSRA to see whether it will fall under the body’s regulation. Companies will also have to publish a prospectus, just like a firm would for an initial public offering (IPO) on the stock market. Any market intermediaries, or secondary market operators dealing with ICOs must be approved by the FSRA.

There are, however, some ICOs that will remain unregulated. If a token issued as part of an ICO does not constitute an “offer of securities” it will remain unregulated. In such instances, the regulator said investors should exercise “extreme caution” before committing money.

“The risk of fraud and loss of capital is therefore significantly higher. This is particularly likely to be the case where a token issuer promises extremely high investment returns that are disproportionately high relative to those generally available in the market,” the FSRA’s guidelines state.

The Abu Dhabi financial watchdog also said that virtual currencies are not legal tender. Instead, they are seen as “commodities” in the same vein as precious metals or fuels. Therefore, they remain unregulated.

Abu Dhabi’s regulator appears to be trying to find the right balance to the growing cryptocurrency world and contrasts to other approaches globally. Neighboring emirate Dubai, for example, recently issued a warning about ICOs and said that it does not regulate them. China has completely banned ICOs.

In Japan, regulators have made bitcoin legal tender, though they have not yet ruled on ICOs.

The FSRA said that it is currently talking to the Japanese Financial Services Agency (FSA) about how it has gone about regulating bitcoin. Abu Dhabi’s authorities said it is not ruling out bringing virtual currencies under its regulatory remit.

“For us, we do see a lot of challenges in regulating something which was designed not to be regulated. We recently established a fintech reach with the Japanese FSA, and through such cooperation we hope to see how they regulate these and if there are risks they see,” Wai Lum Qwok, executive director of capital markets at the FSRA, told CNBC by phone.

“We are open to carving virtual currencies into the regulated space.”

Cryptocurrencies have had their fair share of critics. JPMorgan Chase CEO Jamie Dimon recently called bitcoin a “fraud”, while Wikipedia Founder Jimmy Wales called ICOs an “absolute scam.”

But the FSRA said that, when regulated properly, ICOs can be a way for companies to raise money in a more transparent, and less expensive way.

“We are trying, like most regulators, to remove disproportionate barriers to sensible innovation. The ICO tech, when used appropriately and in a regulated fashion, can be a good innovation,” Kiew-Smith said.