ICOs are new fad among investors
But, there are chances that the investments may fade away too:
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.
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.
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