Initial Coin Offering is an unregulated method of crowdfunding by making use of cryptocurrency. It is the most significant trend happening in cryptocurrency recently and is being in use mostly to fund the creation of new cryptocurrencies. In Initial Coin Offering, or ICO, people offer new units of cryptocurrencies to investors in exchange for bitcoin and ethereal (which again are cryptocurrencies). If there is a substantial demand, the pre-created token can be sold and traded through cryptocurrency exchanges. These days, ICO has become a standard tool to revolutionize the whole financial system.
For some time now, the North American Securities Administrators Association (NASAA) has been keeping a close eye on ICO. The reason behind this action is because the NASAA members firmly believe that trading with cryptocurrencies tends to pose a considerable risk for investors. They point out that the increasing interest in ICO can serve as a ground for alleged frauds. Some people have a more limited approach to viewing things, especially regulators from South Korea and China. In China, they believe that the ICO model is an illegal form of crowdfunding.
Origin of Initial Coin Offering
The Initial Coin Offering is believed to be founded by Satoshi Nakamoto, and its creation involves a lot of mystery. Nakamoto is claimed to be living in Japan and owns one million bitcoins. ICO gained popularity and is marketing as the new method for companies to raise money by using the mix of the traditional technique of fundraising. In ICO, the funds collected are as ether or bitcoins. The company creates an Ethereum or bitcoin address to receive money, and the details shall be visible on their website.
It is exactly similar to opening a new bank account where people can send money. Investors can send money as digital currency to the given address in exchange of new tokens. The company utilizes the bitcoins to pay their staff or use the cryptocurrency to fund the project. The website will have clear details about the company and what the funds will be used for. The token issued or created are traceable as a token of an existing blockchain or as a new blockchain.
The bitcoins paid to a particular deposit address will reflect or register in blockchains, and hence, it has great transparency. Anyone can view the quantity of money coming to the ICO address. Though the received amount is transparent, it is difficult to figure out who had sent the funds. It simply means it is hard to tell who has invested in the project, unlike in the traditional fundraising models where the investors are known.
How does Initial Coin Offering work?
ICO involves selling a brand new digital form of currency as a discounted token as a way to raise money. If the discounted cryptocurrency succeeds in value, just as stocks do, the investor earns a profit. However, unlike the stock market, the digital currency or token doesn’t hold any ownership rights or entitle the owner to get cash flows like dividends. Investing in digital money is not easy, and it does involve risks. However, with the continued growth in bitcoin value, many investors are moving to ICOs.
What are the risks involved in Initial Coin Offerings?
When compared to other funding methods, ICOs carry monetary value, just like real cash, and will continue to stay that way as long as blockchain and token sales exist. However, there are advantages and disadvantages to consider. The liquidity has benefits, as well as problems, when it comes to ICOs. Pre-investors want their share of liquidity, but after issues arose, the tokens began to be traded on decentralized exchanges where there is little transparency. It merely means people can back off at any point before it meets its real value or reaching to the projections.
Another risk involved is that post-sale coins fluctuate dramatically in value and potentially put pressure on the company. It also limits the company’s ability to raise more capital. The startups that use ICO are unaware of the implications of crowdfunding, thus creating a demand for a permanent investor relations group to communicate efficiently with the public. Unlike normal crowdfunding methods, your investors are generally large speculators who can actively short you in the real market. For instance, Augur, which is a type of ICO, made their tokens tradable to cut down the effects of early speculation.
The fact that some tokens can be copied to make a better token raises some level of concern. If this happens, the clone might get more value than the original token. It can occur when the token is not an intrinsic part of the crypto network.
Russian central bank imposes regulation on ICO
Recently, the Bank of Russia has come forward to raise their concern about ICOs. The bank has confirmed that it continuously monitors the cryptocurrency market and is working towards creating a framework to regulate cryptocurrency usage and ICOs. The country’s central bank is again allowing the development of ICOs or similar financial models within Russia. In the notice they published, the risks involved in using cryptocurrency for trading was clearly highlighted.
As cryptocurrencies are issued by anonymous entities, there are chances for the people to get involved in illegal activities including laundering. The central Bank of Russia has already advised their citizens of the increased risk with ICOs. Like Russia, their countries, including the United States, Singapore, and Hong Kong, has also established regulations on ICOs.
Initial Coin Offering, or ICO, is the brand new way of raising money, but it is one of the most risky investments as well. No matter the level of diligence the investors make, there are many possibilities that ICO can go wrong somewhere. ICO and its practices are still in the infant stage, but in the coming years, it’s going to become more common. Then the regulations will slowly catch up. For blockchain startups who consider this method of crowdfunding, it is essential to measure the risk along with the compelling perks. We need to explicitly monitor the concerns raised by North American Regulators and why the NASAA is closely watching the ICOs.