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Understanding Initial Coin Offerings: technology, benefits, risks, and regulations

25/04/2018

3 700 682 293 $
in 2017 through initial ICOs

Organizations have raised $3,700,682,2931 in 2017 through Initial Coin Offerings (ICOs). The popularity of ICOs has rocketed in 2017 and we are currently seeing a lot of discussions on whether investors should look into this investment given the associated risks.

Regulators all around the world are currently assessing cryptocurrencies and ICOs to determine if current regulation applies or if there are necessary adjustments.

In a whitepaper produced in collaboration with Stellar2, we aim to explain the functioning of ICOs, why they are favored by new businesses (and particularly those active into blockchain technology), what are the benefits, the risks for issuers and investors; as well as the regulatory considerations to keep nurturing innovation.

An Initial Coin Offering (ICO), also known as a token sale, token generating event, or initial token offering, is an event in which an organization sells digital tokens for the purpose of obtaining public capital to fund software development, business operations, business development, community management, or other initiatives. Tokens can have various attributes, and contrarily to an Initial Public Offering (IPO), those are rarely linked to an ownership in the organization.

We currently hear a lot about risks associated to ICOs but we rarely speak about the benefits for the issuer or investor. Why is it gaining attractiveness? Why does it become the go-to solution for innovative projects when it comes to raising fund? The benefits for the organizations rely on, but are not limited to the positive network effects, the built-in customer base, the marketing power of such actions and the investors’ outreach which can be qualified as non-discriminatory and global.

The risks are threefold, first, the consumer protection which must be paramount. Given the nature of ICOs, their reach, some investors could be subject to phishing scam.

In addition, it might prove difficult to know what is the jurisdiction of the ICO and the regulation applicable. In terms of market risks, price volatility, market manipulation and network lag constitutes the biggest challenges of such market at the moment. Finally, using blockchain does not prevent from complying with the existing regulations.

Raising money via ICOs will be more and more frequent in the future. Numerous countries are taking drastic measures against ICOs such as bans or categorizing tokens as securities but these measures should be temporary, to protect the investors, while the authorities work on a set of adapted regulations, nurturing the innovation. Moreover, existing regulations can apply to a certain extent to the ICOs, it is then necessary to perform a thorough analysis and assessment of what is in place to adapt it and know how does that apply. ICOs and cryptocurrencies also bring opportunities to the financial industry and could be part of the diversification strategy of some investment funds for example. We’re only witnessing the birth of an additional capital market, a decentralized one. It will grow and learn from its mistakes, similarly to the capital market we know today.

It will grow and learn from its mistakes

(1) Source: www.coinschedule.com/stats.html accessed on 1st of February 2018. (2) Available for download : bit.ly/2hQRpT7.
Head of Operations and Projects Luxembourg House of Financial Technology (LHoFT)
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