What Initial Coin Offerings Are, and Why VC Firms Care

What Initial Coin Offerings Are, and Why VC Firms Care

The venture capital industry is beginning to take a good, hard look

at a new financial instrument coming out of the bitcoin community — Initial Coin Offerings, or ICOs. Also known as “token sales,” this new fundraising phenomenon is being fueled by a convergence of blockchain technology, new wealth, clever entrepreneurs, and crypto-investors who are backing blockchain-fueled ideas. ICOs present both benefits and disadvantages, as well as threats and opportunities, to the traditional venture capital business model.

Here’s how an ICO typically works: A new cryptocurrency is created on a protocol such as Counterparty, Ethereum, or Openledger, and a value is arbitrarily determined by the startup team behind the ICO based on what they think the network is worth at its current stage. Then, via price dynamics determined by market supply and demand, the value is settled on by the network of participants, rather than by a central authority or government.

Venture capitalists, who generally have been standoffish to the ICO phenomenon, are now becoming more interested in it for a number of reasons. One is profits — cryptocurrency investors made some massive returns in 2016, with cryptocurrencies from Blockchain startups Monero and NEM both seeing 2,000% increases in value. For example, the cryptocurrency used for the Ethereum network, called Ether, saw its value double in just a few days in March 2017. Yes, in three days, people who invested in Ether doubled their investment. Those investors can opt to cash out to a fiat-backed currency, or wait for the cryptocurrency to continue to rise (or fall). Volatility is a two-way street. While the price of Ether has been rising, Bitcoin has dropped 20% to $1,000 dollars from a record $1,290 on March 3, 2017.

The second reason VCs are becoming more interested in ICOs is because of the liquidity of cryptocurrencies. Rather than tying up vast amounts of funds in a unicorn startup and waiting for the long play — an IPO or an acquisition — investors can see gains more quickly, and can pull profits out more easily, via ICOs. They simply need to convert their cryptocurrency profits into Bitcoin or Ether on any of the cryptocurrency exchanges that carry it, and then it’s easily converted to fiat currency via online services such as Coinsbank or Coinbase.

What traditional investors don’t like about any of this is the regulatory uncertainty; the high valuations and over-capitalization; the lack of control over financials, strategy, and operations; and the lack of business use-cases. And like any industry, the ICO arena has had its fair share of outright scams, pump and dumps, and blatant Ponzi schemes. However, much of the criminal activity is now being mitigated by self-organized, crowdsourced due diligence in the community, as well as by external parties such as Smith and Crown, a research group focused on cryptofinance, and ICO Rating, a ratings agency that issues independent analytical research on blockchain-based companies. At least one VC firm is moving into cryptocurrencies. Blockchain Capital is set to raise its third fund via a digital token offering in the first-ever liquidity-enhanced venture capital fund (where people can invest without locking their money up for years on end) via a digital token called BCAP.

ICOs are the Wild West of financing — they sit in a grey zone where the U.S. Securities and Exchange Commission (SEC) and many other regulatory bodies are still investigating them. The main problem is, though, that most ICO’s don’t actually offer equity in start-up ventures; instead, they only offer discounts on cryptocurrencies before they hit the exchanges. Therefore, they don’t fit into the current definition of a security, and are technically outside of traditional legal frameworks. Secondly, they are global instruments — not national ones — and they are funded using bitcoin, ether and other cryptocurrencies that are not controlled by any central authority or bank. Anyone can invest, and they can even do so pseudo-anonymously (it’s not impossible to find out who people are, but it’s not easy, either). Currently, there’s no Anti-Money Laundering (AML) law or Know Your Customer (KYC) framework, though some companies are working on that. One example is Tokenmarket, a marketplace for tokens, digital assets and blockchain-based investing, that has teamed up with the Stock Market of Gibraltar to offer KYC- and AML-compliant ICOs.

Detractors of these new funding schemes scream for structure and protection, point out the scams, demand more control, and say that without equity, investors don’t have enough skin in the game. Meanwhile, proponents retort that there’s a real need for freedom to invest outside the accredited system, which sees the wealthy getting wealthier. They argue that the door needs to close on the domination of Sand Hill Road in Silicon Valley and other VCs and investors in the tech industry who have been making massive returns on the backs of entrepreneurs for far too long.

How Blockchain Works

For blockchain startups, ICOs are a win-win — they allow startups to raise funds without having equity stakeholders breathing down their necks on spending, prioritizing financial returns over the general good of the product or service itself. And there are many in the blockchain community who feel that ICOs are a long-awaited solution for non-profit foundations that want to build open-source software to raise capital. Non-profits usually hold about 10-20% of the total cryptocurrency they issue; as Ethereum did in their ICO in 2014, with 20% going to the development fund and the remaining going to the Ethereum Foundation. This is so they have a vested interest in building more value, as well as having reserves for growth in the future. (As of March 2017, the market capitalization of the ether token was more than $4 billion.)

The market cap for bitcoin is now close to $20 billion, and half of that is allegedly owned by less than one thousand people, who are called “bitcoin whales.” Many of them are in China, but there are also hedge funds and bitcoin investment funds who hold massive amounts of bitcoin. Most made their money early on by buying or mining bitcoin when it was still under $10 (in the early days of 2011-2013). It’s now worth approximately $1,120 per bitcoin. These “bitcoin whales” are currently the ones who make or break many of the ICOs. Some of the enormous profits they have made in bitcoin are being channeled back into innovation, as many of them seek to diversify holdings, as well as support the ecosystem in general.

More than $270 million has been raised in ICOs since 2013, according to Smith and Crown (not including the $150 million raised in The DAO scandal, which was returned to investors). Since 2013, there’s been about $2 billion invested in blockchain and bitcoin startups from the VC community. ICOs are becoming more and more popular for startups seeking to get out of self-funding, bootstrapping starvation mode and avoid being locked in by venture capitalists, watching their own equity drown in a sea of financing rounds. ICOs are dominating the overall crowdfunding charts in terms of funds raised, with half of the top 20 raises coming from the crypto-community. In a recent conversation, MIT scientist and author John Clippinger described the vast potential of this new movement to me

as such:

One way of thinking about a crypto-asset is as a security in a startup, which begins with a $10 million valuation and becomes a $10 billion dollar entity. Instead of stock splits, the founding crypto-asset gets denominated in smaller and smaller units; in this case 1,000 to one. Here, everyone in the network is an equity holder who has an incentive to increase the value of the network. All of this depends upon how well the initial crypto-asset and its governance contract are designed and protected. In this instance, good governance, e.g. oversight, yields predictability, security, and effectiveness, which in turn creates value for all token holders.

Just as venture capitalists are taking a hard look at this new phenomenon, so should we all. It’s not just about the money that can be made; it’s also about funding blockchain projects and, in the near future, other startups and even networks, as Clippinger noted. We now have a way to easily fund open source software, housed under foundations rather than corporations, that can truly drive faster innovation. Right now, blockchain technology is at the stage where the internet was in 1992, and it’s opening up a wealth of new possibilities that have the promise to add value to numerous industries, including finance, health, education, music, art, government, and more.

Article Produced By
Richard Kastelein

Richard Kastelein is the publisher of Blockchain News, Founder of Blockchain Partners and interim Chief Marketing Officer of Humaniq, a blockchain startup focusing on banking for the bankless. He’s also on the steering committee of the Blockchain Ecosystem Network and is organizing the CryptoFinancing 2017 event.

https://hbr.org/2017/03/what-initial-coin-offerings-are-and-why-vc-firms-care

SEC Chairman Jay Clayton Says Bitcoin Not a Security, Most ICOs Likely Are

SEC Chairman Jay Clayton Says Bitcoin Not a Security, Most ICOs Likely Are

 

 

Jay Clayton, the chair of the US Securities and Exchange Commission (SEC),

believes that Bitcoin (BTC) is not a security since it acts as a replacement for sovereign currencies, CNBC reports today, June 6. Clayton, when speaking about the “incredible promise” of distributed ledger technologies driving efficiencies in markets, clarified during today’s CNBC interview his thoughts on cryptocurrencies that are “replacements for

sovereign currencies:”

“Replace the dollar, the yen, the euro with Bitcoin. That type of currency is not a security.”

While Clayton did not comment on specific assets besides Bitcoin about their status as securities, he went on to explain that what he considers to be securities are tokens that act as

digital assets:

“Where I give you my money and you go off and make a venture […] and in return for me giving you my money, you say, ‘You know what, I’m going to give you a return.’ That is a security, and we regulate that. We regulate the offering of that security, and we regulate the trading of that security.”

When asked to make clear his statement on whether Initial Coin Offerings (ICO) are securities, Clayton told the interviewers, CNBC’s Bob Pisani, “Bob, I just did.” Clayton added that the SEC won’t support changing the definition of a security to support the ICO community, as they are not “going to do any violence to the traditional definition of a security which has worked well for a long time.”

The SEC chair had previously praised distributed ledger tech, blockchain as an example, during February’s SEC and Commodity Futures Trading Commission (CFTC) cryptocurrency hearing. At the time, Clayton had noted that every ICO that the SEC had seen so far would be considered a security. Altcoins Ethereum (ETH) and Ripple (XRP) have come up in the cryptocurrency security question, with Joseph Lubin of Ethereum emphatically denying that ETH was ever a security, and Ripple similarly rejecting a security classification. Ripple is now facing a class action lawsuit from a disgruntled investor claiming that the sale of XRP is the sale of an unregistered security, with a former SEC chair recently appointed to represent Ripple in court.

Article Produced By
Molly Jane Zuckerman
Molly Jane is a Russian Literature major from California with a background in writing. She joins Cointelegraph after working as a freelance journalist and blogger..

https://cointelegraph.com/news/sec-chairman-jay-clayton-says-bitcoin-not-a-security-most-icos-likely-are

Covering the technology, people, and culture of the cryptocurrency and blockchain world

Covering the technology, people, and culture of the cryptocurrency and blockchain world

 Why most ICOs will fail

This blank white paper still has more detail than most

because it has the name of an actual person on it  Almost every day, I get an email about a hot new initial coin offering (ICO). These come from tech companies selling their future services. In my stock portfolio, I’m happy to find anything that can give me 10 percent return over the course of a year. These days you can measure a crypto portfolio in 2x, 3x, or even 10x (as in, 1,000 percent). But lately, all this good news has been bothering me.

The financial magic works like this: imagine if someone builds a casino in your neighborhood and they fund the entire operation by selling their poker chips ahead of time. With that money, they will pay for every slot machine, every bottle of liquor, every plate in the dining room, and the salaries of every manager and construction worker involved. Would you go for it? Most of us would say no, and even most gamblers would just rather buy some chips when they actually go to the casino.  

Now imagine that casino is being built by Terry Benedict, the fictional casino owner from Ocean’s 11. Benedict offers you a deal: they’re selling the chips now, but they are only ever going to have 1 million of them total. In the future, the casino’s customers will have to buy chips from you. Benedict has created an artificial supply problem. They even look at Benedict’s past success (he got robbed and got his money back with interest—that’s security!) and his team on this project and they go all in. Even non-gamblers (“investors”) are buying chips and holding on to them. They’re placing bets before the casino is ever built. Heck, why go to a casino when you could stay home and watch your chips go up in value?

That’s one of the many problems facing tech companies that do an initial coin offering before they even build their businesses. And just like casinos, these token-operated tech companies have no hope of every getting any money from businesses, governments, or banks. To unravel this $353 billion problem facing the blockchain tech world, I caught up with Brendan Taylor and Patrick Manasse at MonetaGo. They run an “enterprise focused” (read: businesses, governments, and banks) blockchain solutions company down the street from Modern Consensus’ decentralized office in New York.

Modern Consensus:
No matter how exciting a blockchain solution is, every ICO seems to suffer from the same flaw.

Brendan Taylor: “Most people would prefer to use a service with a known and stable price so they can make a decision on the cost rather than rely on the open market. A lot of ICOs that are supposedly falling within the law are classified as utility tokens, meaning they grant the right to use the future service of that network.”

Exactly. If you ran a business and you found that you save money on shipping by using a token-operated tech company, that would only drive up the price of that token and you’d lose your solution.

BT: “ICOs attract speculators. The price of the service is then driven by speculation instead of the fundamental value of the underlying service itself. That is a critical disconnect between what the ICO is intended to achieve and what every single ICO actually achieves.”

What determines a successful ICO?

BT: “A successfully ICO only mean the raise is successful, not that the company is successful. That’s really determined by only two things: 1) Length of the marketing period—the longer the marketing period the higher the chance of success; 2) Price of various digital assets on the day of the launch.”

Whoa. It’s the opposite of what a startup is supposed to do.

Patrick Manasse: “In a lot of cases, they’re not even building out a prototype. It’s normal in the startup space to conceive a product, work toward a ‘minimum viable product,’ and then work toward the desired product. Even then, you improve it with everything you learn. Google, Amazon, Facebook—they get better every day. Landscapes change. A change in a regulation can change how your product functions. A lot of the ICO companies are putting together a white paper and really trying to evangelize the notion that there’s a problem that only they will be able to solve without doing the homework of whether the approach they’re taking will even solve that problem.”

Even good products can suffer from getting pigeonholed in by their ICO.

PM: “An ICO is primarily a way of raising funds. Putting aside the legality about it, they’re using it to raise money for companies. Regardless of what they are trying to do, we believe there are a number of reasons why you don’t want to use this type of infrastructure and tokenization.”

But even knowing that, there are a lot of smart people digging in to ICOs.

BT: “The driver for doing an ICO is never in line with the service they’re offering. They are a regulatory grey area. You don’t have to comply with getting accredited investors. It’s an easy and quick way of accessing money in a space where there is plenty of spare cash. People who made a lot of money in bitcoin and ethereum are looking for places to store that cash. On the other side of the coin, the people trying to raise cash see ICOs as a way of getting their funds. To stay in that regulatory grey area, you have to issue utility tokens. That token equals the right to use whatever service that company is offering in a tokenized system. A tokenized system has plenty of drawbacks.”

Even if the token is perfect, it still locks out the majority of the market because businesses and governments can’t use them.

BT: “The only current legal path is by utility token. You are selling the right to use the future service. Ultimately, the tokens will have to be used in a network. When you’re talking about an enterprise solution, none of our clients are authorized to use any tokenized system. So right from the getgo, our clients cannot use a system that uses a token.”

PM: “You really can’t take this approach. If you’re trying to do anything in enterprise, you cannot use this type of architecture. If we decided to do an ICO tomorrow, we would be making it impossible to do long term or near term.”

And when you say “enterprise,” you mean everything that isn’t for a consumer. So businesses, schools, governments, banks, etc.

BT: “Ninety-nine percent of all companies doing an ICO will never be in an enterprise space. Maybe Ripple. They’re trying really hard to make that model work.”

Your team never did an ICO, but you are currently running a blockchain in the enterprise space?

BT: “The network we launched in India is to mitigate fraud. First of all, our network is not public. It is private permissioned. All participants that are permissioned do see everyone else’s data. The information we are sharing on this network needs to be known by all participants. We are trying to stop duplicate financing. The only way to do that is to share that financing to the rest of the industry. But nobody wants to share who their clients are, what their volume is. How do you get around sharing information without sharing information? Traditionally, you trust a third party. The alternative is to obscure that information or create a digital fingerprint of it. We use the same SHA-256 hashing algorithm. That fingerprint identifies an invoice that is not on our network. Someone would have to find the invoice itself to give you the details. And they will see the same fingerprint registered by the financier. So the real information of the invoice is only held by the customer and the financier.”

Should people who have already bought into ICOs be worried?

PM: “The SEC has been busting people for straight up fraud. They recently sent out a swooping set of letters to many of the companies that touted as premiere ICOs, mainly because they are very clearly doing something illegal. What we’ve learned in the last few years is that there is a reason why they don’t want any type of tokenization. There are data issues with having any kind of open network. If you’re a bank, you don’t want to publish every single one of your transactions. Really you don’t want to broadcast that information. From an enterprise side, who is going to be actually using an open network?”

So an ICO could put a good idea in a bad spot?

PM: “There are really only a handful of companies trying to think long term. The arc that we’ve seen is that three years ago, it was just early adopters, a few budding companies. Last year, it was a lot of financial institutions. This year, it was a 500-to-1 ratio of startup companies trying to sell ICOs to a real enterprise company. People have come up with this notion that this is the way to raise a bunch of money very quickly. The long-term prospects of that company are not looking good. Now they are locked into an infrastructure and processes that have a number of issues. It does make for a very crowded marketplace. It makes for a lot of noise. So, we’ll see who’s around in the next few years.”

I still do think that blockchain is the future. I just think people are on the wrong wave to the future with most ICOs. Startups need to make mistakes to grow.

BT: “We have never tried to be a blockchain. We rely on hyperledger and we provide applications that live on these networks. We set the up and maintain them for the operators and users of them.”

The problem with every ICO now is they do one of two things: they solve a problem that no one has or they provide a solution that only works if everyone uses their system.

BT: “The problem we initially had was we tried to ‘boil the ocean’ we took on an impossible task and made everything along the way more complicated. That was never very successful because they were too untargeted. Now we start with the problem and solution and tell them how we use blockchain on the back end.”

PM: “Our clients were having a problem with fraud. They wanted to find a solution to make it possible to prevent that. The technology that makes that possible is interesting, but it’s in the background. We’re solutions first.”

So yours worked the second you plugged in your servers?

PM: “From Day One, our clients were able to see if they had their invoicing right. Nobody will know the details of the financing—the name of the company or anything. ou know the receipt of the finances. And no single party has control over this network. It’s not our company, it’s not one client. If you’re permissioned,you can join the network. You can derisk your entire portfolio and provide lending rates and financing rates. We’re not trying to reinvent the wheel. We’re trying to provide a simple solution to customers facing a serious problem.”

And Monetago works no matter what accounting software your customers want to use or whatever workflow they have in house?

PM: “Yep. Everyone who is permissioned into the system can see if a receivable has already been financed.”

Should we be concerned about these bloated ICOs that have all our money? In the Economist last week I saw a Silicon Valley phrase for the first time, “Startups perish more often from indigestion than starvation”

PM: “That is sometimes true. There are companies that get a lot of visibility. Overfunding can impact the trajectory of future financing. That is a tightrope you need to walk. or every company that is funded, there are lots of companies that are not. But most people never hear of the companies that starve.”

Is there some portfolio theory here? Getting involved in a lot of ICOs means you cast a wide net.

PM: “In a lot of cases, an investor is really looking for that one success. They invest in 10 startups a year or 100 a year. They’re hoping that one or two are ultra-successful. But your traditional business training comes into play: Team, company, and structure. Market and solution. All the way you would judge a company.”

What about these venture capitalists who are leaving their funds and going all crypto?

BT: “Sometimes you hear of some high-flying investor who has spun off his own crypto fund, but their success is still only driven by the frenzy. A lot of the actual successes are based on speculative valuations. So the fact that someone does create a new coin and the valuation goes up and they cash out—that’s a success for them. Speculation, not real results. You’ll see that die out as these companies fold.”

If you advised a project today would you talk them out of doing an ICO?

PM: “There’s temptation to raise that easy money. But if you understand the space and understand the systems, you don’t want to go for an ICO. We wouldn’t do one because it’s the wrong choice.”

Article Produced By

Brendan Sullivan

Brendan Sullivan is a writer, producer, and author of the memoir Rivington Was Ours: Lady Gaga, the Lower East Side, and the Prime of Our Lives.

Disclosure: he owns cryptocurrencies.
https://modernconsensus.com/people/innovators/why-most-icos-will-fail-monetago/

The Price of Bitcoin Cratered in 2018. But Here’s Why ICOs and VC Funding to Crypto Is Breaking Records

The Price of Bitcoin Cratered in 2018. But Here's Why ICOs and VC Funding to Crypto Is Breaking Records

WAN CHAI, HONG KONG, HONG KONG ISLAND
A Bitcoin ATM machine in Wan Chai, Hong Kong.

The value of cryptocurrency poster child Bitcoin may be flagging heading into the second half of 2018, but excitement in the space only appears to be increasing—at least, when considering venture capital funding and initial coin offerings (ICOs) during the first half of 2018. Indeed—if 2017 was a windfall for Bitcoin owners, 2018 has so far been a nightmare. The cryptocurrency has shed roughly 50% in value since the new year and is now at about $7,400, far from its all-time high of $20,000 in December. Similarly, jobs listings related to Bitcoin and blockchain appear to have followed the ups and downs of the cryptocurrency’s price.

Amid the dark days for crypto enthusiasts, however, are signs that investors still believe that cryptocurrency trading will continue to grow, and are also betting on the future of its underlying technology—blockchain. Take venture capital funding that goes to early-stage, often highly risky, startups, as an example. Globally, venture investors poured in $964 million into blockchain or cryptocurrency-related startups in 2017. Now, not even half way through 2018, investors have already exceeded the prior year’s funding by plowing $1.4 billion into such startups.

Though cryptocurrency values have fallen 46% to $329 billion according to CoinMarketCap, venture capitalists such as David Pakman, a partner at Venrock, still think trading of such assets will rise in the long run. “There is so much institutional money waiting” for a properly regulated cryptocurrency exchange, said Pakman, whose firm struck a partnership recently with New York-based firm CoinFund, which helps entrepreneurs build startups using blockchain. “We’re not watching the price of the cryptocurrencies as a barometer of the health of the industry. We are wondering which projects will gain large market share, and what new problems they may solve.”

Much of those gains in venture capital funding have also been driven by investors who see promise in blockchain, a database held by multiple parties that updates in real time, says Nizar Tarhuni, associate director of research and analysis at PitchBook. Developers have looked into using blockchain to solve a host of problems, from tracking pork and diamonds to solving the refugee crisis. With increasing regulatory scrutiny on ICOs, which became popular in 2017 as a way for startups to raise funds more cheaply and quickly, some investors may also be looking instead to get into crypto by funding companies through more traditional means such as venture capital, says Andy Tang, managing director at Draper Dragon Fund.

“We see more investors investing in equity rather than tokens themselves. Because tokens are still a grey area in the U.S. Equities are not,” he said. That continued bullishness in the crypto space has led to the four largest venture capital deals in the industry yet, including a $133 million fundraise for Basis, a firm creating a coin with a set value, and $122 million to R3, an enterprise blockchain startup, according to PitchBook data. But here lies the paradox. Despite this increased regulatory scrutiny in nations such as the U.S. and China, fundraising from ICOs has only risen since last year.

The hot new thing of 2017, initial coin offerings were billed as a way to raise startup funding quickly, and cheaply—cutting out advisors and middlemen. But government officials have questioned issuers’ claims that some ICOs don’t involve equity stakes, and therefore are not subject to more onerous securities regulations. The U.S. Securities and Exchange Commission has recently cracked down on the space, while the Chinese government has sought to ban ICOs outright. Still, investors and ICO issuers have continued seemingly without concern in 2018. Investors have poured $9.2 billion year-to-date into ICOs, according to Coinschedule, into a total of 343 offerings so far. Notably, Coinschedule also includes pre-sales, such as that of secure messaging platform Telegram’s massive $1.7 billion raise. That dollar amount this year dwarfs what ICOs raised a year earlier: about $3.9 billion spread across 210 deals.

So who is investing in ICOs? Mostly investors outside of the U.S. and China, says Coinschedule CEO Alex Buelau, in countries with more ICO-friendly regulations. “Most ICOs now have a clause that you can’t be an American or a Chinese investor to be a part of this ICO,” he said. “So now ICOs are based out of Singapore, Estonia, Malta, or Gibraltar.” In some cases, governments, such as Venezuela, have even embraced cryptocurrency, with the country’s $735 million pre-sale of Petro coin, a digital currency pegged to the price of oil, now considered the second largest ICO of the year.

Less regulatory oversight though, may not always be a positive sign. Included in Coinschedule’s ICO figures may be fundraises by startups with shoddy track records, buoyed by investors who similarly, may not have enough experience to make such investment decisions. Meanwhile, the infrastructure to deal with hackers and scammers seeking to get a piece of ICO funds is still weak. During the anticipated $4 billion EOS ICO, which is set to conclude 7 p.m. Friday, some investors said they had fallen prey to phishing scams.

And there lies the flip side to the increasing funds moving into crypto. The bottom line for venture capitalists: Early stage companies are risky, and much of the dollars going in may never come out. “There’s high amounts of early stage speculation in cryptocurrency startups that could be really risky,” said Pakman. “And a bunch of those projects could never ship, or ship and end in failure.“

Article Produced By
The Ledger-Bitcoin

http://fortune.com/2018/06/01/bitcoin-price-ico-2018-record-billions/

 

How to avoid getting duped by a bogus initial coin offering

How to avoid getting duped by a bogus initial coin offering

  • 271 initial coin offerings have appeared so far in 2018, according to Coindesk. In 2017, there were 340.
  • In the last several years, investors have poured more than $12 billion into ICOs.
  • Red flags include promising high investment returns and accepting credit cards for investors to buy in.

"There's a real chance the [Securities and Exchange Commission] or another regulator won't be able to recover your investment, even in cases of fraud," said Lori Schock, director of the SEC's Office of Investor Education and Advocacy.

An ICO involves the sale of digital coins or tokens, which are typically used to fund a project that involves blockchain technology. In simple terms, this technology — which underlies bitcoin and its crypto brethren — ensures that all transactions using it are secure. Some ICOs are pitching either a new cryptocurrency (i.e., the next bitcoin wannabe) or could be exchangeable for one that is planned by the ICO's promoters. Others might give investors the right to use the coins toward a product or service that

will be offered.

"There's a real chance the [Securities and Exchange Commission] or another regulator won't be able to recover your investment, even in cases of fraud." -Lori Schock, Director of the SEC's Office of Investor Education and Advocacy

While not all of these digital assets are considered securities — regulators have said it depends on the specifics of each ICO — many meet the definition of a security and therefore are subject to U.S. securities laws. Already this year, 271 of these offerings have appeared, according to Coindesk. That's on top of more than 340 in 2017. In the last several years, investors have poured more than $12 billion into ICOs. However, the SEC says no ICOs have been registered to date.

Rather, the SEC's Cyber Unit — which has only been around since last September — has brought several fraud cases against operators of ICO offerings. Just this week, the agency announced that it has obtained a court order to shut down an alleged ICO scam that pulled in $21 million in investor money. In total, the SEC alleges $600 million has been raised in fraudulent schemes.

State securities regulators also have been busy. During the first three weeks of May alone, the North American Securities Administrators Association's "Operation Cryptosweep" resulted in nearly 70 inquiries and investigations and 35 pending or completed enforcement actions related to ICOs or cryptocurrencies. Additionally, other investigations into potentially fraudulent conduct are under way, and that's on top of more than a dozen enforcement actions previously undertaken by state regulators.

Even if a particular ICO is held with good intentions, there's no way of ensuring you'll ever see a return on your money. In fact, as is the case with any investment, you could lose all of it. Worse, you face the risk of criminals being behind the ICO and absconding with your money. And if the perpetrators are located overseas, the task of tracking down your investment could be impossible.

"The currency might be virtual, but the pain is real," Schock said. Both federal and state securities regulators have been engaged in public outreach to warn investors about the risks associated with ICOs and cryptocurrencies. The SEC even created its own bogus website to show investors what an ICO scam could look like.

Here are some of the big red flags to watch for.

Promise of huge returns

Generally speaking, investing comes with no promises. So if you're looking at an ICO that is pledging a certain return on your investment, you probably should walk away. "There are no guarantees when it comes to investing,"

Schock said. "A guaranteed return is a major red flag."

"There are no guarantees when it comes to investing. A guaranteed return is a major red flag." -Lori Schock, Director of the SEC's Office of Investor Education and Advocacy

 

Credit cards welcome

If you're invited to use your credit card to buy into the ICO, be very wary. Most licensed and registered investment firms don't let their clients use credit cards to buy investments or fund an account. Remember, too, credit card debt typically comes with interest charges if you can't pay off the balance immediately. So that investment could cost you more than anticipated. "If you don't have the money to buy it outright, you certainly can't afford to go into debt for it," Schock said.

 

The deal will disappear

Often, scammers will use high-pressure tactics to create a sense of urgency in the deal."Anything that pushes you to take action now, or discounts that disappear or countdown clocks … those are red flags of fraud," Schock said.

What else you should do

Even if the ICO's white paper — which details the investment and has become a standard with ICOs — looks legit and makes sense to you, don't let that be the end of your due diligence. Look into the people behind the offering. Scam ICOs have included pictures and bios of nonexistent workers. Make sure you can independently confirm that the executives listed are real people with credentials. Additionally, don't let a celebrity endorsement — real or fake — draw you in. The SEC has warned that it could involve a paid promotion, and that the person pitching the ICO might have little understanding of what they're recommending.

Article Produced By
Sarah O'Brien

Personal finance reporter

Sarah O'Brien reports for CNBC's personal finance team.
https://www.cnbc.com/2018/05/30/how-to-avoid-getting-duped-by-a-bogus-initial-coin-offering.html

 

South Korea’s National Assembly Makes Official Proposal to Lift ICO Ban

South Korea’s National Assembly Makes Official Proposal to Lift ICO Ban


Nearly eight months after a blanket ban on initial coin offerings (ICOs),
 
South Korea’s National Assembly has reportedly made an official recommendation to allow domestic ICOs in the country. According to a report by Business Korea on Tuesday, the 300-member national legislature has made an official proposal to allow domestic ICOs in the country by preparing and adhering to relevant investor protection provisions.

The National Assembly’s special committee on the fourth industrial revolution even accused the government of ‘neglecting its duty’ in responding to the blockchain sector, the report suggests. The much-publicized ICO bans by Korea and China before it has seen an exodus of domestic companies going to friendlier jurisdictions in Singapore and Switzerland to conduct ICOs.

Discussions on blockchain and ICOs between the National Assembly and the government will ‘accelerate’, the report suggests. More pointedly, the National Assembly has put forward a legislative and policy proposal to recommend allowing ICOs. The committee on the 4th industrial revolution also called on the government to form a task force comprising of both public officials and private experts to “improve transparency of cryptocurrency trading and establish a healthy trade order.”

It further stated:

“The administration also needs to consider setting up a new committee and building governance systems at its level in a bid to systematically make blockchain policy and efficiently provide industrial support. We will also establish a legal basis for cryptocurrency trading, including permission of ICOs, through the National Assembly Standing Committee.”

The legislative effort first came to light earlier this month when a group of lawmakers led by Rep. Hong Eui-rak of the Democratic Party of Korea – the ruling government – began drafting a bill to legalize the launch of new ICOs in the country. “The bill is aimed at legalizing ICOs under the government’s supervision[…],” he said at the time. “The primary goal (of the legislation is helping remove uncertainties facing blockchain-related businesses.”

The embracive turn follows recent remarks from the new chief of Korea’s financial watchdog who has chosen to put the spotlight on the “positive aspects” of cryptocurrencies while suggesting authorities will relax cryptocurrency curbs in what is among the world’s largest crypto trading markets.

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ICO News

https://www.ccn.com/south-koreas-national-assembly-makes-official-proposal-to-lift-ico-ban/

 

 

University of British Columbia Study: ‘Compliance Trilemma’ Limits Potential of ICOs

University of British Columbia Study: ‘Compliance Trilemma’ Limits
Potential of ICOs

Initial Coin Offerings (ICO) are facing a regulatory
“compliance trilemma,”

according to a recent study released Nov. 19. The research, funded by regtech platform iComply and “supported by” Canadian non-profit national research organization Mitacs Canada, was carried out by the University of British Columbia (UBC).To prepare the report, UBC’s research team investigated the ICO space over the course of six months, focusing primarily on North America, but also delving into some other countries and jurisdictions. The team conducted 45 qualitative interviews with individuals in the ICO space, including representatives of the finance, law, and science sectors of the field.

Per the study, ICO issuers face a “trilemma,” wherein they can only address two of three objectives at a time, those being “having a compliant offering,” “reaching a distributed pool of investors,” in a manner that is “cost-effective.” The researchers define compliance as following regulations in the home jurisdiction of both the issuer and investor. While a broadly distributed pool of investors is said to be the principal benefit of an ICO as a funding mechanism, the cost of complying with financial regulators becomes “much greater” if the investor pool becomes more distributed.

“If issuers forgo these costs, the risk of being non-compliant rises significantly. The result is a trilemma, whereby issuers currently must forgo one of these goals to realize the other two, or to compromise on all three,” the study explains. The trilemma further reveals four basic approaches available to ICO issues, which are “the Maverick ICO,” “the Private ICO,” “the Hybrid ICO,” and no ICO at all. The first option refers to ignoring compliance for maximizing ICO reach and cost effectiveness, which reportedly runs a huge risk of regulatory enforcement.

The second approach focuses on targeting only accredited and institutional investors by sacrificing distribution, which may not affect cost-effectiveness but raise challenges in secondary market trading control. Regarding the Hybrid ICO, the report reads that it “compromise[s] on all three dimensions by issuing in select markets, resulting in bounded cost effectiveness, compliance and investor scope,” resulting in a combination of risks.

The researchers found that companies wishing to undergo an ICO sought relief from the trilemma through relevant regulatory authorities. Participants in the study reportedly called for amendments to regulation, including clarifications of existing regulation and development of “fundamentally new” regulatory definitions and frameworks. The study concludes that this “trilemma” has “substantially limited [the] potential” of ICOs,

noting:

“Many actors with legitimate ventures that could benefit from ICOs are likely holding back, due to combination of confusion over how exactly they might comply with financial regulations within and across jurisdictions, and the prohibitive costs of doing so manually.”

As Cointelegraph recently reported, ICO performance in the third quarter of 2018 was in part characterized by “overall disappointment," in comparison with previous quarters. Last week, Cointelegraph reported that in a self-described “first,” the U.S. Securities and Exchange Commission (SEC) had imposed civil penalties against two ICOs over their failure to register their token sales with the agency.

Article Produced By
Ana Alexandre

Total change in her career took Anastasia into the world of analytics and business information as a researcher and translator in 2010. Some time later she got into FinTech, a dynamically developing segment at the intersection of the financial services and technology. Ana joined Cointelegraph in September 2017.

https://cointelegraph.com/news/study-compliance-trilemma-limits-potential-of-icos

What is an ICO, Exactly?

What is an ICO, Exactly?

crypto

From Wall Street brokers to small time investors,

finance can be a dangerous game. The world’s currencies are constantly in shift, falling in and out of favour, and the results can often be disastrous (or highly fortuitous) for those involved. People win and lose big. That’s a fact of life, and it’s no different when cryptocurrencies are involved instead of regular cash. Having taken the world by storm in the past decade, the blockchain tech behind Bitcoin, Litecoin and other altcoins has changed finance – and money itself – forever. But how does one go about bringing a virtual currency into existence? Well, that’s where ICOs come in.

A Dictionary Rundown

An ICO is an initial coin offering much similar to an IPO. An initial public offering involves a new company selling shares to investors, the process underwritten by an investment bank. The company stocks are then listed on various markets. When it comes to an ICO however, no stocks or shares are sold.

Instead, it’s all about coins.

When somebody wants to launch a new cryptocurrency they’ll advertise its perks with something called a White Paper, then ask for investment from the public. Interested parties then donate existing cryptocurrency, such as Bitcoin, and in return receive some of the first rounds of, let’s say, ProfitCoin. The hope is that ProfitCoin will gain popularity, be used a lot, and as such rise in value. The investors will then, well, make a profit from their ProfitCoin ICO. Either way, they’re supporting the ecosystem and development of cryptocurrency in general.

ICOs vs Standard Investing

But why bother with an ICO? There are stocks, gold, oil, salt and pepper to be bought and sold after all. Forex already exists. Why venture into this new zone of risk and exploration? Well, put quite simply, because you may regret it otherwise. How many tech savvy folks and investors are kicking themselves for not jumping on the Bitcoin bandwagon years ago? With ICOs, said folks now have a second chance to find the next cash cow. It’s a gamble, yes, but a relatively informed one if you take the time to research. If you were to head over to the Paddy Power Casino, make your deposit, get your bonus and take to the roulette table, for example, you’d be taking a similar informed risk. You can work out the odds, see the potential for a win, and decide whether or not to take it.

An ICO is similar, but instead of knowledge of cards or probability, you need knowledge of the cryptocurrency world. You need to read the new coin’s White Paper first things first, and then you can decide whether or not to go ahead.

The All Important White Paper

An ICO White Paper is the cornerstone of any new coin campaign. It lays out what this new currency can offer that others have not, it explains how the idea works, why it works, and why it’s better than what’s come before. It is, in essence, a business pitch; interesting, thorough, well-explained. A White Paper is addressed first and foremost to you, and to other potential initial coin investors around the globe – so best brush up before trading in your precious Bitcoin for ProfitCoin. The world of finance changed when cryptocurrency came into existence, even more so when it grew into a global market. Now the world of crypto is changing thanks to ICOs, and with every White Paper comes a new opportunity to win big.

Article Produced By
FinSMEs

http://www.finsmes.com/2018/11/what-is-an-ico-exactly.html

What Is An ICO Token And How Does It work?

What Is An ICO Token
And How Does It work?

What’s the definition of crypto token?

It's an entity with a value specified by the eminent. If it's a fashion startup, one token can be equal to one dress or a yearly license of a software in case of a hi-tech startup. You even can issue tokens of yourself and a token holder will be able to buy an hour of your work with the token. You can “tokenize” everything.

What’s the difference between cryptocurrency coins and tokens?

This is a difficult part. The easiest answer: tokens are not a currency. You don’t need to create a Blockchain to issue tokens, which is a must-have for a cryptocurrency, but you use an existing one (usually Ethereum, which was originally created as a platform for smart contracts and evolved to be a currency). A coin is a money equivalent, something that defines value and serves as a value transfer. A token is a symbol of a contract, the value does not depend on mining, gold price or any dynamic market criteria. A friend of mine once gave me a note saying that he will always make me a coffee on demand. He still does it, after 10 years, it was a heck good token!

What is a token contract and how does it work?

Ok, a token is not a coin, got it. But still, something should regulate it’s transaction, value etc? How does that work? You do need a platform for it. Let’s take Etherium as an example, since its one of the most popular platforms for smart tokens.

Here is the full contract cycle:

  1. Tokens creation: a company writes the basic rules (tokens amount, token value, special conditions). Once created the platform will serve as a very smart notary for all the future transactions, making sure all the conditions are carried out.
  2. Tokens acquisition: when somebody wants to buy a token, the process is really similar to buying a coke in a vending machine. You approach a machine, drop the coin and push the button “coke” (choose the token you want to buy). The machine checks if there are “cokes” in stock and if you are eligible to buy it. If everything is fine- you get your drink (or token in our case). The machine says “have a nice day” and updates the stock info (one coke less now).
  3. Token transaction: In case you have a coke, you can just pass it to your friend. For money or for free. In tokens reality, you have your token wallet which is supported by the same platform that issued the token. You can transfer your token using the wallet. And again, a virtual notary, powered by a smart contract, will make sure you do it according to the rules. Moreover, all the wallets activity is constantly recorded and being updated.

Is all this free? Nope. Somebody needs to pay for the notary, vending machine technician and coke delivery. In the token world – the operation processing called “gas.” So, each time you ask to buy or sell tokens, there will be some “gas” spent and you will pay its fee.

Note: the fee is not static. It depends on a number of transactions awaiting. You can define the max cap you are willing to pay for your gas. If the token cost is, say, $10 and the gas fee is $20 is not a great deal, isn’t it? So, you can say that you pay no more than $2 for your gas, click “submit” and find something else to do meanwhile. The system will serve the highest gas bids first and eventually yours when your time will come. There is a chance, you will wait for a long time (if others are willing to pay more than you). But you always can rise the gas cap.

Types of tokens

Let’s see the most common types of tokens.

Token – token (Utility tokens), the most popular type

Remember amusements parks from the childhood? Roller coasters, carousels, hot dogs and cotton candy? At the entrance, you’ve got tokens to buy food and enter the attractions. So, let’s pretend that a company is an amusement park and with the tokens, you can buy different services just as you do with carousels and hot dogs. Now, to make the analogy perfect, let’s say that you can buy lots of tokens before the park is officially opened, or when it’s just opened. If the park becomes popular, its tokens will be much more expensive. Like $10 for a hot dog. But a smart child who bought the tokens before the opening will still enjoy his meal for $1. This is basically the idea behind issuing and buying tokens. But if in the amusement park you buy the tokens at the entrance, where do you get a cryptocurrency token? The answer is ICO – Initial Coin Offering.

Token – stock (Equity tokens)

In this case, ICO is completely equal to IPO. Usually, token-stocks are issued when a startup does not require a crypto-technology. In this case, token holders will get dividend or fixed commission. They also will be able to take part is the company decisions. All this honor for supporting the project in the beginning of its life.

Token – credit

This is a loan; a holder gives to a startup. It’s another way to rise money. For example, you invest X to get X + 10 percent.

Token – combo

If you are not completely confused, you will be now: sometimes a token can belong to more than one type. For example, tokens Sia and Digix are both tokens and stocks. And Steemit has all the three types of tokens (Steem, Steem Dollars (SBD) and Steem Power (a denomination of VESTS).

How do you trade tokens?

This part is pretty similar to coins. You have to register on an exchange for buying and selling tokens. The transaction conditions can be really complicated: the contract can include multiple rules like “you can sell it only before a specified date” or “after some date but only for a certain vendor.” So, when investing in tokens, you should read the “small letters” really thoroughly.

Article Produced By
Cointelegraph

https://cointelegraph.com/ico-101/what-is-an-ico-token-and-how-does-it-work