Initial Coin Offering (ICO) or Initial Token Offering (ITO) is probably one of the most hype terms in the world tech arena at the moment. Appeared for the first time on the scene in 2013, one of the first ICOs was conducted by the platform Ethereum back in 2014, raising more than $18 million. This is a small number compared to those that have been raised more recently by some other players. The website Coinschedule reports that, in 2017 alone, 211 ICOs have raised $3,460,880,828 so far, with the largest getting $257 million.
But what is exactly and ICO? There are different views on this, depending on the structure of the transaction and the distributed networks involved, but in general terms and according to Investopedia an ICO is “an unregulated means by which funds are raised for a new cryptocurrency venture. An Initial Coin Offering is used by startups to bypass the rigorous and regulated capital-raising process required by venture capitalists or banks. In an ICO campaign, a percentage of the cryptocurrency is sold to early backers of the project in exchange for legal tender or other cryptocurrencies”.
To do an ICO, a company needs to produce a white paper, which is basically a detailed plan of their project and why it will succeed. Investors or backers buy the new crypto coins or “tokens” in the hope that the startup succeeds and the related cryptocurrency appreciates, generating an interesting return for them. As a consequence investors are betting on multiple ICOs, hoping to invest in the successful one and consequently in the next Bitcoin. Coins or tokens can either represent equity shares in the fundraising startup or, more frequently, vouchers for pre-paid services.
One can certainly notice a number of similarities with crowdfunding and specifically equity and reward crowdfunding: a large group of investors finance a startup, motivated by a potential financial return or other forms of extrinsic reward (i.e. services vouchers) and in exchange they are given equity shares or vouchers. On top of this, we could add the fact that it is currently an “unregulated” market – that is without specific regulatory interpretations of existing laws regarding ICO, but still in need to comply with all relevant aspects of rules as set out in European and national laws such as those concerning securities, payments and consumer protection – as it was for crowdfunding a few years ago. ICOs and crowdfunding share indeed a number of similar aspects, reason why people often refer to ICOs with the term “crowdsales”.
Given the numbers ICOs are generating, they are certainly not going unobserved by authorities and regulators. While most of them are still silently watching, a few have expressed concern or warnings about this unregulated mean. China has even formally banned them. The US regulator accused two ICOs of fraud late 2017. The topic is also keenly monitored within European institutions, from the European Commission, the European Parliament to the European Securities and Markets Authorities. The latter published two opinions in November 2017, in which it observed the rapid growth in ICOs globally and in Europe and expressed concern about high investor risks of ICOs and “that investors may be unaware of the high risks that they are taking when investing in ICOs.” Additionally, ESMA concluded that firms involved in ICOs need to meet relevant regulatory requirements and “that firms involved in ICOs may conduct their activities without complying with relevant applicable EU legislation”. The German financial authority, BaFin, has published a statement on ICOs, announcing that they have no intention to apply any specific regulation at the moment.
ECN has been monitoring the market since some time and believes that crowdfunding can share a few valuable lessons out of its experience with the ICOs market. Early dialogue with authorities is highly recommended, for instance. On Tuesday 21st November 2017, ECN organized together with its member Dentons a CrowdTuesday in Berlin on ICOs and how blockchain will influence crowdfunding. Members of the German financial authority, BaFin, will take part to the event to present their view on this for the first time, hopefully starting an ongoing dialogue. On Thursday 8th February 2018, ECN and Dentons are organising in Frankfurt another CrowdTuesday discussion ICO and blockchain opportunities and hurdles, with BaFin, the European Commission and other stakeholders.
Additionally, ECN has recently joined various organisations to support a Charter for ICO, which seeks to help establish and guide consensus in creating best practices for the launch of ICOs or ITOs. This, together with transparency and open dialogue are definitely a good starting point to make sure that the ICOs trend is going to stay here, in the best interest of all the actors involved.