ICOs are new fad among in­vestors

But, there are chances that the in­vest­ments may fade away too:

Banking Frontiers - - Investment Options - Mo­han@bank­ingfron­tiers.com

Ini­tial Coin Of­fer­ings (ICO) are un­reg­u­lated means by which funds are raised for a new cryp­tocur­rency ven­ture. An ICO is of­ten used by star­tups to by­pass the highly reg­u­lated cap­i­tal-rais­ing process. Here most of­ten a per­cent­age of the cryp­tocur­rency is sold to early back­ers of the pro­ject in ex­change for le­gal ten­der or other cryp­tocur­ren­cies.

A re­cent re­port in Knowl­edge@Whar­ton says ICO is for tech star­tups looking for cap­i­tal­ize a vir­tual dream. “It lets them raise mil­lions of dol­lars on­line with just an idea for a prod­uct or ser­vice to be delivered in the fu­ture. For in­vestors, the al­lure is the abil­ity to in­vest any amount very early on in star­tups whose cryp­tocur­rency could soar in value. Such is the at­trac­tion of ICOs that the first quar­ter saw record 152 of­fer­ings hit the mar­ket, rais­ing $4.83 bil­lion.”

The re­port ex­plains the process: An ICO lets a young com­pany raise money, in ad­di­tion to ven­ture cap­i­tal, an­gel in­vestors and oth­ers, by sell­ing to­kens that can come in the form of its own cryp­tocur­rency. In re­turn, in­vestors get free or dis­counted prod­ucts and other perks once the startup ac­tu­ally launches the busi­ness. In­vestors can also sell or trade these cryp­tocur­ren­cies for other to­kens in crypto ex­changes. But un­like crowd­fund­ing, ICOs typ­i­cally are global, most lever­age blockchain and their in­vestors typ­i­cally seek a re­turn on their in­vest­ment through sales of to­kens.

NO REG­U­LA­TION

What is ad­van­ta­geous for the star­tups se­lect­ing the ICO route is the fact that there is lit­tle or no reg­u­la­tory su­per­vi­sion. How­ever, the Whar­ton re­port sug­gests that this is about to change since the sums raised are so huge and there is scope for scams and the reg­u­la­tors are con­sid­er­ing ways to cre­ate a su­per­vi­sory frame­work. Ex­perts be­lieve this is not an easy task. For ex­am­ple, blockchain, which is the un­der­ly­ing tech­nol­ogy be­hind cryp­tocur­ren­cies, is in it­self a de­cen­tral­ized ledger sys­tem that at the mo­ment is not con­trolled by any­one. Since the trans­ac­tions are car­ried out on­line, there is a global reach with different govern­ments of­ten act­ing against each other. The U.S. Se­cu­ri­ties and Ex­change Com­mis­sion (SEC) has in re­cent months in­creased its scru­tiny of ICOs by is­su­ing dozens of sub­poe­nas. The SEC is of the view that cryp­tocur­rency and ICO mar­kets have sub­stan­tially less in­vestor pro­tec­tion than tra­di­tional se­cu­ri­ties mar­kets, with cor­re­spond­ingly greater op­por­tu­ni­ties for fraud and ma­nip­u­la­tion. There are also in­stances of the SEC stop­ping ICOs.

The Whar­ton re­port sug­gests that when de­vel­op­ing rules for cryp­tocur­ren­cies and ICOs, reg­u­la­tors must ask them­selves three ques­tions: What is the goal? Who is the tar­get of the reg­u­la­tion? What is the method of en­force­ment? “For ex­am­ple, the ob­jec­tive could be con­sumer pro­tec­tion, ac­cord­ing to a Euro­pean re­searcher. Other goals could be anti-money laun­der­ing or counter-ter­ror­ism. But when it comes to choos­ing the en­tity to be reg­u­lated, it is not that easy. The blockchain is a transna­tional, mul­ti­juris­dic­tional peerto-peer net­work. There are many ac­tors, es­tab­lished in many places,” it says.

PROS & CONS

From a generic point of view some of the ben­e­fits of ICOs are:

1. They are a quick, easy and efficient fundrais­ing op­por­tu­nity as the coin sales can be cus­tom­ized and done through var­i­ous plat­forms. The costs as­so­ci­ated with mar­ket­ing and con­tri­bu­tion set­tle­ment are con­sid­er­ably lower than some of the other pop­u­lar mech­a­nisms used for fundrais­ing.

2. They can strengthen de­cen­tral­ized applications where the more the users, the better would be the ex­pe­ri­ence. 3. ICOs can be mar­keted eas­ily, of­ten to a large, tar­geted au­di­ence with lit­tle ef­fort. Po­ten­tial in­vestors can, there­fore, find out about a par­tic­u­lar ICO through var­i­ous means.

How­ever, there are dis­ad­van­tages too: 1. There is no for­mal reg­u­la­tion, no au­dits and no cer­ti­fi­ca­tion of claims. En­ter­prises of­ten float ICOs with lit­tle due dili­gence and even with­out as­cer­tain­ing the vi­a­bil­ity of the prod­ucts or ser­vices. In fact, the en­ter­prises are legally not re­quired to re­lease any in­for­ma­tion on their lat­est de­vel­op­ments. There is there­fore, an un­der­ly­ing risk.

2. Many a times, there is no cer­tainty about re­sale prices of the to­kens. Cryp­tocur­rency ex­perts warn that peo­ple sub­scrib­ing to ICOs would do well to carry out re­search into the prospects of an of­fer and de­ter­mine the en­ter­prise’s trust­wor­thi­ness be­fore in­vest­ing. Hav­ing said this, an ICO can be a highly lu­cra­tive in­vest­ment.

An ICO of­fer from Bit­tLend, a new global cryp­tocur­rency firm

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