Blockchain technology is a powerful paradigm-shifting development that has a great deal of potential to drive a massive amount of change across many different industries. The most clearly visible application of blockchain technology at this point in time is Bitcoin, which is frequently featured in mainstream media news for the rapid gains in value it has experienced, but there are more than 2,000 alternative currencies and tokens based on the same blockchain technology.
Collectively referred to as cryptocurrencies or cryptocoins, these solutions all claim to deliver a unique feature set or address a specific problem in a more elegant and efficient manner to those that have come before them. The core similarity between these disparate solutions is that they all share the concept of blockchain.
The collective worth of all of the different cryptocurrencies currently in existence is between $150 to $200 billion USD, but due to their highly volatile nature, this value fluctuates wildly. Despite the nascent nature of the crypto industry, cryptocurrencies are rapidly increasing in value, which makes them extremely attractive to investors.
Recent developments in the cryptocurrency industry, however, have raised some concerning questions regarding some of the newest ways in which they are being used. The greater part of the 2,000 or so cryptocurrencies that currently exist serve no practical function, or present no real likelihood of experiencing mainstream adoption.
As a result, Initial Coin Offerings, or ICOs, have catalyzed a chain of events that have, to some extent, destabilized the cryptocurrency industry as a whole. ICOs have rapidly increased in popularity recently as a crowdfunding analog that works in a similar way to the IPOs that are presented when a company wants to offer ownership opportunities to the public.
ICOs offer the opportunity to raise extremely large amounts of capital in an extremely short amount of time through a relatively simple and straightforward process. Some ICOs have raised millions of dollars in a matter of minutes. The current state of ICO in the crypto world can be compared to a wild west gold rush, and in a similar fashion, the current state of ICO affairs is complete with bandits and hustlers.
The rising success of ICOs have seen a similar rise in investor complaints directed towards ICOs, primarily due to a lack of transparency on behalf of issuers, and a high degree of misunderstanding of ICOs by investors. In some cases, issuers have used ICOs to raise vast amounts of capital, only to disappear with it.
As a response to this growing issue, many major regulatory bodies around the world have directed their attention toward the cryptocurrency ecosystem, such as China’s recent decision to temporarily ban all ICOs. In this article, we’ll break down initial coin offerings and find out what they are, as well as examine some of the core issues they represent. We’ll also take a look at some of the responses of regulatory bodies to gain perspective on the future of ICO regulation.
What Are ICOs?
Initial coin offerings can be compared to the initial public offerings that are presented to investors when an organization wants to make their platform available to public investors. When a company such as Snapchat, for example, wants to generate a significant amount of investment capital in order to fund rapid growth, it will offer to investors shares at prices that are based on a variety of factors. The Securities and Exchange Commission imposes regulations on this process that are designed to protect investors who decide to buy in.
In the case of ICOs, a company will offer investors the opportunity to invest in a new cryptocurrency that in many cases has a specific business aspect related to it. In most cases, the ICO will accept major cryptocurrencies such as Ether or Bitcoin. Rarely, ICOs also accept traditional currency in return for “crypto-tokens” that essentially function as shares in the company.
The regulations imposed on IPOs by the Securities and Exchange Commission, alongside standardized business practices, give them a certain level of consistency and reliability. With an IPO, your investment may turn out to be foolishly speculative should the business invested in not succeed, but regulatory bodies at least ensure that a number of precautions have been undertaken as the IPO was prepared.
With an ICO, however, almost all rules function in an individual, case-by-case basis. If you’re interested in seeing what an ICO looks like, it’s worth taking a look at CoinSchedule, which presents a comprehensive list of all of the ICOs that are currently on offer, as well as upcoming ICOs. Examining any given ICO will provide a breakdown of how many tokens are offered, an explanation of the buy in process, and a detailed whitepaper explaining how the ICO works. The business model, terms and conditions, and legal framework are all established by the ICO itself.
One of the best examples of a successful ICO is rising crypto star Ethereum. Beginning as an ICO funded by Bitcoin, Ethereum is now just as trusted by cryptocurrency investors as Bitcoin, and is currently positioning itself as a decentralized computing network that specializes in a unique method of storing and verifying data in the blockchain called smart contracts.