GOLD RUSH TO THE DIGITAL EL DORADO

Over the years, several forms of capital raising have been developed in order to fund projects of any kind: these range from personal savings and loans to crowdfunding and angel investors. As increasingly more cryptocurrencies - backed by blockchain technology – have emerged in the last few years, a new form of fundraising is now taking the investment world by storm: Initial Coin Offerings.

Initial Coin Offerings (ICOs) are a fundraising tool that involves the use of cryptocurrencies. It can be thought as a crypto-version of crowdfunding, and it has become the new trend in the blockchain world. Any company starting an ICO provides investors with crypto-tokens in exchange for cryptocurrencies of immediate, liquid value – typically Bitcoin or Ethereum. In turn, if the project becomes successful and if there’s any demand on the market, such tokens can be traded on all cryptocurrency exchanges for other cryptocurrencies or fiat money; for this reason ICOs are also defined as token sales.

ICO versus IPO

ICOs are often compared to IPOs, but actually there are some differences between the two: unlike shares in IPOs, tokens do not confer ownership rights, they have their own market value, and their price depends on their acceptance and acknowledgement by the market rather than on the performance of the company to which they are related. Typically, investors purchase tokens to access the service of the platform that created them or in the hope that the value of the token will arise in the future so that profit will be made.

There are two main reasons why ICOs are considered to be superior than IPOs:

-      Reduced costs: from a company’s point of view, setting up ICOs involves lower costs than IPOs. For instance, creating a new form of cryptocurrency is now easy and cheap thanks to technologies such as the ERC20 standard, which allows the creation cryptocurrencies on top of the Ethereum platform. From the investor point of view, investing in ICOs allows avoiding costs such as tax on capital gains. Moreover, decentralisation on the blockchain allows all parties involved in ICOs to avoid intermediary costs such as those arising from regulators, stock exchanges, brokerage, and investment banks

-      Greater liquidity: due to the presence of a yet-poorly-definite form of regulation compared with IPOs, ICOs allow companies to bypass capital-raising requirements imposed by venture capitalists or investment banks, thereby raising capital more quickly. At the same time, since tokens can be traded immediately once the ICO period comes to an end, investors can cash out whenever they want, unlike investing in traditional startups, where their money might be tied in even for years

Despite being considered a revolutionary way to fund and promote project development, ICOs also present some downsides: due to the lack to date of a standard regulatory framework, many ICOs are scams and have the only aim to fraud the investor, raising money pre-product and giving nothing in return. In such cases, investors have no legal claim on the money lost and may never recover the money they spent on fraudulent ICOs. It is important to be wary or any companies announcing ICOs with “guaranteed” high ROI and highlighting the urge to buy “right now”

Regulation

Due to the increase in fraudulent activities, regulatory authorities around the world, following the example of the Security and Exchange Commission (SEC), have started to publish warnings and raise awareness about the risks of investing in such new, unregulated financial assets as ICOs. Moreover, arguments have been made about the fact that, since their value may appreciate over time, many token sales might actually be seen as security sales, and therefore they need to come under strict regulation like all assets considered to be “securities”.

Some countries taken further action: recently China, followed by South Korea banned ICOs, declaring them “illegal financial activities that might severely disrupt the economic and financial order of the country”. China stated that, since they are not issued by monetary authorities, tokens used in ICOs have no legal status equivalent to money and therefore cannot be traded and used as such.

The introduction of regulatory standards will change the status quo: ICOs might turn out to be no more convenient than IPOs and end up being forgotten. Alternatively, we will see more and more successful ICOs with increasingly less frauds, bringing us to what is already seen by many as the quickest and most effective way for companies to raise money and become successful.