Over the busy past year, it is very likely you recurrently heard words such as ‘ICO’, ‘blockchain’ and ‘cryptocurrency’. The new hype seems to revolve around ‘tokens’ and ‘distributed ledger’ concepts, but in the end, do you know what all this fuss is about? Let us simply explain what could become (or may have already become) the future of fundraising and of the whole financial system.
ICO: UNDERSTANDING THE BASICS
First of all, ICO stands for ‘Initial Coin Offering’. Put in simple terms, it is an unregulated method for companies to raise money by selling to investors a new digital currency and future coins called ‘tokens’ of a blockchain project, in exchange for other cryptocurrencies of immediate value such as Bitcoin or Ethereum.
An ICO may be driven by a precise goal or a funding limit. In this case, every token will have a pre-assigned price and a static token supply that won’t change during the ICO period. Some ICO campaigns have dynamic funding goal that will influence the number of tokens distributed, with more funds received meaning higher token’ s price.
These tokens can be seen as the equivalent of shares purchased in an IPO except that, unlike shares, tokens don’t grant ownership rights. However, they can confer investors other benefits like a portion of profits or, they can be a way of payment for a new app. Different types of token imply different kinds of rights given to investors.
Experts usually date the first ICO back to 2013. Mastercoin – now called Omni -succeeded in raising the sizeable amount (at the time) of US$600,000 to fund a Bitcoin exchange and a transaction platform. This first successful Initial Coin Offering opened the door to many other similar fundraising campaigns, few of the largest among them being The DAO (US$152 million), Tezos (US$232 million) and Filecoin (US$257 million).
THE PROS AND CONS
One of the main drivers of investing in ICO is the hope for quick and strong returns on investment.
Just in April 2017, nearly US$250 million was invested in ICO and in December 2017 it was reported that 50 companies on average ICO every month. With such a fast pace, there is no wonder why this fundraising method is favoured by investors while critics would argue this thriving evolution means ICO is just another financial bubble.
This risky but appealing method has led to shifting away from traditional and usual fundraising processes such as IPO (Initial Public Offering), Venture Capital or Crowdfunding, even if it bears some similarities with them (online marketing campaign comparable to Crowdfunding and existence of investors like an IPO for example).
Another essential aspect of ICO to take into account as well is the absence of regulation. ICO campaigns are launched and managed online but there are no operative laws or requirements for them. Still, you can spot some recurring elements across campaigns such as the existence of a website, a white paper, developed social media presence and active online forums. But nothing officially binding.
Without any legal barrier, it is not a surprise to find out many fraudsters taking advantage of the unregulated ICO’s landscape. History is full of many ICO projects which did collect money but delivered nothing at all, sent unlicensed seller, or were hacked due to vulnerabilities in software (i.e., hackers stole over US$50 million in Ether from DAO project).
Adding to this unregulated system, other issues arise such as finding a proper service provider and legal guidance, following proper market trends or get relevant financial analysis. One could argue this unregulated system is a threat. For us at Amotion Labs, no regulatory body to limit what individuals can do with their digital assets means endless opportunities.
WHAT DOES THE FUTURE HOLD?
If we take a closer look at Hong Kong, we will see that the city is a primary place to conduct an ICO. Not only the economical environment is prosperous, it is also combined with a state of mind favourable to fintech innovation and a regulatory environment which has not restricted ICO’s regulation – unlike China or South Korea – but has clarified it. In September 2017, Hong Kong’s Securities and Futures Commission issued a statement declaring that some tokens could be treated as shares in a company, meaning that they would be governed by securities regulation. This announcement was received positively by the Hong Kong community which thinks it would avoid fake ICOs and could benefit the industry.
According to Coindesk, over US$4 billion were raised in 2017 around the world. Beyond raising money, ICO is also expected to explore innovative ways to connect token with other innovative applications. ICO has an immense potential which enables every person and firm to raise funds, but it could also be used to manage larger projects such as reconstructing the financial system of shares or securities as it decentralised money but also stock creation and trade. It can also be used in the long-term development of a company by integrating the tokens as a real element of the firm’s business plan (i.e. customers can pay for the company’s solutions with the tokens).
A revolution of the whole financial system is happening, quickly. So… are you in?
Amotion Labs, a Hong Kong-based fintech company, is here to help you successfully launch your ICO and simply get the benefits of it. From process to promotion, and from technology to security, we got you covered!