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ALL TO KNOW ABOUT ICO


An initial coin offering (ICO) is a means of crowdfunding centered around cryptocurrency,[] which can be a source of capital for startup companies. In an ICO, some quantity of the crowdfunded cryptocurrency is preallocated to investors in the form of "tokens," in exchange for legal tender or other cryptocurrencies such as Bitcoin or Ethereum. These tokens become functional units of currency if or when the ICO's funding goal is met and the project launches.
ICOs provide a means by which start-up companies can avoid costs of regulatory compliance and intermediaries, such as venture capitalists, bank and stock exchanges, while increasing risk for investors. ICOs may fall outside existing regulations or may need to be regulated depending on the nature of the project, or are banned altogether in some jurisdictions, such as China and South Korea.


Detail

The term may be analogous with 'token sale' or crowdsale, which refers to a method of selling participation in an economy, giving investors access to the features of a particular project starting at a later date. ICOs may sell a right of ownership or royalties to a project, in contrast to an initial public offering which sells a share in the ownership of the company itself. According to Amy Wan, a partner at Trowbridge Sidoti LLP practicing crowdfunding and syndication law, "The coin in an ICO is a symbol of ownership interest in an enterprise—a digital stock certificate, if you will." In contrast to initial public offerings (IPOs), where investors gain shares in the ownership of the company, in ICOs, the investors buy coins of the company, which can appreciate in value if the business is successful. These coins are sometimes "pre-mined", eliminating the need for proof of work. Often contributions are capped at a certain value and depending on how long the ICO lasts, on a per-day basis. Conversely, those same coins can depreciate if the company does not perform.
At least 400 ICOs have been conducted as of August 2017 Ethereum is (as of August 2017) the leading blockchain platform for ICOs with more than 50% market share. These tokens are called ERC20. According to Cointelegraph the Ethereum network ICOs have resulted in considerable phishingPonzi schemes, and other scams, accounting for about 10% of ICOs. Older coins focused on being a currency, while newer coins based on the Ethereum blockchain have developed some controversy through the selling of what is tantamount to "securities" in the form of ICO tokens. These developments have created an evolution in the ICO release marketplace towards the new "utility" token replacing the typical token. Some commentators believe that "utility tokens", which can be exchanged for a unit of service such as storage, could avoid such questions.

Criticisms

As a mechanism for scams

ICOs can be used for a wide range of activities, ranging from corporate finance, to charitable fundraising, to outright fraud. The US Securities and Exchange Commission (SEC) has warned investors to beware of scammers using ICOs to execute "pump and dump" schemes, in which the scammer talks up the value of an ICO in order to generate interest and drive up the value of the coins, and then quickly "dumps" the coins for a profit. The developers themselves can be guilty of such tactics.
However, the SEC has also acknowledged that ICOs “may provide fair and lawful investment opportunities.” The UK Financial Conduct Authority has also warned that ICOs are very high risk and speculative investments, are scams in some cases, and often offer no protections for investors. Even in cases of legitimate ICOs, funded projects are typically in an early and therefore high-risk stage of development. The European Securities and Markets Authority (ESMA) notes high risks associated with ICOs and the risk that investors may lose all of their cash.Increased regulation of ICOs will reportedly encourage institutional investors to invest in them.

As a bubble

An article in Wired predicted in 2017 that the bubble was about to burst. Some investors have flooded into ICOs in hopes of participating in the financial gains of similar size to those enjoyed by early Bitcoin or Ethereum speculators.

Regulation

The regulatory treatment of cryptocurrencies is evolving and is complex.
Cryptocurrencies are based on distributed ledger technologies which enable anyone to purchase or transfer their cryptocurrency holdings to any other person without the need for an intermediary (such as an exchange) or to update a central record of ownership. Cryptocurrencies can be transferred easily across national and jurisdictional boundaries. This makes it difficult for central authorities to control and monitor the ownership and movement of holdings of cryptocurrencies.
Countries have different approaches to how they regulate cryptocurrencies. This can depend on the nature of the cryptocurrency itself.
There are two main types of cryptocurrencies from a regulatory perspective - utility tokens and asset-backed tokens. Utility tokens may have value because they enable the holder to exchange the token for a good or service in the future, such as Bitcoin. Asset-backed tokens may have value because there is an underlying asset which the holder of the token can attribute value to. In many countries it is uncertain whether utility tokens require regulation, but it is more likely that asset-backed tokens do require regulation.