What is an ICO?
An initial coin offering (ICO) is a form of crowd-sourced fundraising that uses cryptocurrencies. Also known as digital currencies, or virtual currencies, cryptocurrencies work as a medium of exchange using encryption to secure transactions and for creating (known as mining) additional units. Cryptocurrencies, the best known of which is the bitcoin, use distributed ledgers known as block chains to track transactions. There are now hundreds in existence, as the currencies’ independence make them attractive to some users. Cryptocurrencies can be designed to be widely used, as with bitcoin, or to operate within an online network like the Ethereum network that uses ethers to make payments. When a new cryptocurrency is launched, the creators, as with any other project, need funds to make it work. ICOs have evolved to fill this need.
How does an ICO work?
In initial public offerings (IPOs), companies sell their equity, in the form of shares, for cash. Rules that govern IPOs usually require the companies selling equity to be backed by tangible assets. During ICOs, companies exchange their newly created cryptocurrencies — called tokens — for payment in an existing currency, which can be old-fashioned cash, or an established cryptocurrency, often bitcoin. ICO investors profit when their tokens gain in value at a faster rate than the currency they used to pay for them. The value, or “capital gains” of these appreciating tokens can only be realized if they are exchangeable for legal tender, or for goods or services. These fundraising ICOs are conducted online, and are usually announced on a cryptocurrency forum. Most projects have a white paper, a website, and active online forums as a way of building confidence.
Examples of ICOs?
Karmacoin held the first ICO with its April 2014 sale of karmashares. Ethereum sold USD18 million of ether units in July-August of 2014, valuing each ether at less than USD1. As of June this year, each ether unit was valued at USD378. As many as 65 ICOs were completed in China in the first seven months of 2017, raising a combined CNY2.6 billion, according to the Beijing Internet Finance Association. According to the People’s Bank of China (PBOC), 90% of the ICOs that have been launched were fraudulent.
Regulation?
In July, the U.S. Securities & Exchanges Commission (SEC) determined that the virtual currency DAO Tokens were securities, and said that those who offer and sell securities in the U.S. were required to comply with federal securities laws, regardless of whether those securities were bought with virtual currencies or distributed with block chain technology. The People’s Bank of China (PBOC) has now banned ICOs outright, calling them illegal and fraudulent. The PBOC also ordered banks and payment companies to stop opening accounts for digital coin fundraising platforms and to restrict payments into and out of related individual accounts. The clean-up efforts are likely to force hundreds of P2P platforms out of the market because they won’t be able to secure a custodian bank or convince regulators that the deposits are being used appropriately. Analysts expect the ban to be temporary, until new regulations can be issued.
Bitcoin and other cryptocurrencies have been legally accepted as money in Japan since 2014, the South China Morning Post reports.