What is an ICO?
What is an ICO?
Blockchain companies continue to expand our understanding of what is possible. Now they have forced us to rethink what it means to raise capital. If you are interested in this new way of investing, here is what you should know about ICOs.
What is an ICO?
ICO is a cross between crowdfunding and capital raising. With its help, developers raise funds for new blockchain projects. Now, capital raising is often carried out before the project’s launch. The issuing company issues digital tokens and exchanges them for a common digital currency, often bitcoin (Bitcoin) or ether. The token gives access to the project after its launch. If the project is successful, the people who invested in it at an early stage will profit from the growth in the token’s value.
How are ICOs technically organized?
From a technological point of view, the ICO process looks deceptively simple. The new token is transferred to the investor using a “smart contract” in exchange for a certain amount. Usually, funds are provided by transfer to the digital currency developers.
The developers prepare an official document that provides general information about the blockchain project and digital tokens for the ICO. Sometimes a second document is added to it, in which the technological aspects of the project and the ICO itself are considered in more detail. The third document may be a prospectus, which will describe the various risk factors and the investment process.
3Who invests in ICO?
Here are the critical investors with interests in Asia in particular:
· Pantera Capital, the first American investment company focused exclusively on investments in blockchain projects. Pantera has invested in Z Cash, Ripple Labs, and coins. ph.
· Blockchain Capital, established in 2013, was the first venture capital company to agree to consider applications for bitcoin investments. It continues to focus on investing in the bitcoin and blockchain ecosystems. She has invested in Coinbase and Wave, among others.
· Digital Currency Group is an investment company known for backing several blockchain matte projects in Asia, including Melodic, Luno and BTCC.
Why are venture investors interested in ICOs?
Some venture capitalists have decided that the main value of the new technology lies in the protocol, not in the applications.
Digital tokens enable protocol creators to monetize them directly. This is usually done by reserving a portion of the receipts for developers, early-stage investors, or early adopters of users. Once the project is launched and succeeds, investors can start a positive feedback loop and give the tokens market support. Successful applications based on the blockchain protocol generate interest in the protocol itself, for which there is already a ready market. As the price rises, the market cap of the protocol should grow faster than the market cap of the applications.
One of the main attractive features is that the token can be exchanged for a more popular digital currency and then for regular money on a cryptocurrency exchange. This makes the tokens liquid.
5Are ICOs subject to regulation?
Now it is infrequent. But the question makes sense, to put it differently: should ICOs be regulated?
ICO is in many ways similar to the placement of securities. Even the very name of the procedure, “initial coin offerings,” is identical to “initial public offering (of securities).”
Those who claim that ICOs are not securities point to the following:
· During the ICO, investors are not offered a share in the blockchain project.
· During the ICO, you can purchase cryptocurrency. Cryptocurrency is not a security.
· ICO is an international instrument and is not controlled by any regulator or bank.
· A digital token that is issued as part of an ICO can be used, among other things, to access a project under development or purchase services in it.
Those who consider ICO as a placement of securities point out that the procedure and the tokens being placed are pretty consistent with the criteria for safety and its order. Investors participating in ICO expect to make a profit. The heightened interest of regulators is because the offer to purchase is made to the general public.
What are the risks?
ICOs are usually launched at a very early stage of development, sometimes right after concept development. Any investment in a project at an early stage is inherently precarious.
Blockchain is a newly emerging and rapidly developing technology. The industry does not have a quality infrastructure for investors, including analytical support. Therefore, these investments are not suitable for investors who are used to the help of professional intermediaries who track all information about the industry and companies and manage assets in a regulated environment.
The conditions of many ICOs do not meet the standards aimed at combating fraud and money laundering.
The ICO infrastructure does not provide any control over the spending of funds or control over the development of the blockchain project.
However, ICOs are getting more and more attention. In the future, they will be of interest to those who want to raise capital in an unregulated environment with essentially no accountability to investors and no deep understanding of the underlying investment risks. This is a potentially dangerous cocktail.
What will happen next?
ICOs will become a familiar tool. Many commentators believe that their principal value lies in the projects that result from such funding. ICOs provide an opportunity to receive funding at no extra cost and create a network of motivated project supporters. This solves the critical funding gap faced by private companies worldwide before finding a strategic investor or going public.
Regulators will continue to monitor the development of the ICO market closely. Some of them have already started testing blockchain technologies to understand how they work and the risks. Silence or inaction on the part of regulators should not be taken as an endorsement. A high-profile case involving significant losses for retail investors could quickly lead to direct regulatory intervention.
At the same time, ICO organizers will seek to build mechanisms into the placement process that will limit their liability if regulators take this market seriously. Possible measures may include the following:
· Postpone token distribution until the project is up and running.
· Stake only those tokens that can be used (for example, to pay for goods or services) and avoid tokens whose only use is speculative investments.
· Work with open source software and use an open blockchain.
· Manage the project as if it were a listing on a regulated market, including risk disclosure, investor assessment, anti-fraud and anti-money laundering, and reporting to investors.
· Reserve part of the tokens to cover the costs of any license obligations, pay fines, etc.
· Prohibit developers from selling their tokens until the project goals are achieved.
Now ICO is the Wild West of the financial sector. However, many new markets have been civilized in the past. Careful work with this tool will minimize risks and attract funding to blockchain projects.
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