A Brief History of ICO
Mastercoin was the first blockchain project to organize ICO in 2013 which ran for about a month raising around 5,000 bitcoins in the process. The value of the fund at that time was $500,000 – no easy feat for sure at that time.
This opened the gate for new ICOs, with the crypto world hearing the news of a new ICO almost every other day. Talking about the year 2016, there were at least 54 major ICOs conducted, with ICONOMI raising $10 million and SingularDTV raising $7.5 million led the game.
Now, as expected ICOs in 2017 reached a completely new level. AS per ICOdata, there were a total of 875 ICOs conducted in 2017, with a mean of 70 new ICOs per month being opened. The year saw about 537 ICOs being closed and 110 were canceled. And yet that year the firms managed to raise a staggering $6,213,002,958 worth of digital assets in total. The fourth quarter of 2017 alone saw $3.3 billion of ICO funding with the mean of ICO deals opening per month pushing to 138.
As per the report from Fabric Ventures and TokenData though only 48% of ICOs in 2017 were successful, still blockchain startups managed to raise $5.6 billion USD. The top 5 ICOs of 2017 experienced projects like HDAC, Filecoin, Tezos, Sirin Labs and Bancor raising $258, $257, $232, $157.2 and $153 million respectively.
Raising over 6 billion in a year is an achievement and the next year got benefited by this performance significantly. A lot of investors and crypto traders jumped into the ICO investment race to make money, and as a result, the amount of money raised in 2018 (which is yet to end) has already surpassed 2017, despite a lot of regulations and scam convoluting the prospect.
At the start of 2018, observing the amount of scam and failed projects governments in various countries, especially in the US, China, Russia, Japan etc. have taken stringent measures to deal with it. Despite this in 2018 firms have managed to conduct over 1100 ICOs so far. As per last stat published till September 2018, the crypto market raised a whopping $20,074,423,238 this year from 789 IOCs. This shows that the money raised has increased by 222% in 2018 compared to 2017 and the number of ICO has also soared to 113%. September alone saw about 1,4 billion of investment in ICO.
So ICO is a high-risk, high reward venture for both investors and the companies. If you invest in a fraudulent ICO, your money is gone, and if the firm fails to prove the value of their token, their ICO is bound to fail.
Let us now clear out the elephant in the room – what is this ICO exactly. Well, we know that most of you know what it is but let’s see if we can make it clearer for you, just in case you have any misconception.
What is ICO?
Initial Coin Offering or ICO is the event where a startup firm creates their digital tokens or digital coins and sell those to interested buyers to let them use their current or future service. The fund raised is used (a part of it) to either upgrade a service or launch a completely new service – so basically it is a fundraising tool for new blockchain projects. Note here that ICO is also called Tokel Sale, Crowdfunding, or Crowdsale.
The buyers buy these newly generated tokens at a fixed rate by paying in established digital coins especially in Bitcoin and Ethereum as well as often in fiat currencies such as USD, EUR, and GBP depending on what the ICO allows. The buyers can use the firm’s service or can simply choose to sell them later when the time is right i.e. the price is up.
Sounds rather like IPO, right? The answer is yes and no. It has the similarity of IPO (Initial Public offering but there are differences.
Differences Between IPO and ICO
The roles of IPO and ICO seems very similar, but apart from ICO’s obvious link to blockchain, there are a couple of major traits that differentiate each other.
IPO occurs when a private company wants to go public and therefore sell the shares of the firm to the public. This gives the buyers or shareholders a stake or dividend in the company. But in the case of ICO, the buyers purchasing the token don’t have any hold on the firm, instead the token grants them to purchase or use the firm’s service.
Private companies conducting IPOs always have a proven track record i.e. they already have their services or products in place. On the other hand, the startups organizing ICOs in most cases just have their concept i.e. product idea and utility jotted in a whitepaper, far from a completed product, which they preach to attract money.
The third most crucial point is the regulation. IPOs follow a strict regulatory guideline and need approval from government bodies like Securities and Exchange Commission in the US. But. given its decentralized nature rooting on blockchain technology, are not subject to any regulatory rule and therefore not restricted by international borders.
For the fourth point check this example to have an idea. In case of IPOs, you cannot sell the equities of your firm in the US to most of the general public and only those who are eligible are about that 3% of the adults having more than $1 million in net worth. Whereas for ICO, the US SEC has no way to restrict the sale of API keys to the investors without hurting the IT industry, and therefore anyone i.e. 100% of the people in the US can participate in the crowdsale without any constraints. So the user base of ICO is 33 times more than IPO and get increased by 20-22 times if you consider the availability of the sale to the international market.
How Does ICO Work?
We will try to explain this in the simplest term possible.
Let’s say that you want to build a startup company (doesn’t matter what idea you have). You don’t have a product and don’t have the fund to set it up either. All you have is an idea and you need say $10,000 (we are keeping it small!). Now you have two options – get a single or a couple of big investors willing to offer the money, or have a lot of small investors.
The first option is difficult, but the second is easily doable. Let’s say you have a couple of friends who can lend you a small amount of money – each according to their capacities. Since they know you they will give you the money, but you need more people to invest in your company. What to do?
Easy-peasy – they can bring their friends or relatives or other people in the project who, convinced by your startup’s and product’s prospect, is also willing to lend you money. But you need to offer them something of value, right? So, you make a deal – say, for example, when your product or service is ready, they can use the service on a priority basis or can avail it at a discounted rate. Mind here you are retaining the ownership to yourself.
Now the question is why would they believe you that you will hold up your end of the bargain? So naturally, you will keep a ledger detailing who paid what amount of money on which date to you and will issue receipts (token) accordingly to all those investors. Those investors can show these receipts or token when the product is ready to get the benefit.
This is the basic idea of an ICO. But it brings out the question – what is stopping you to breach the trust or manipulate with the ledger? Or you can simply say that the receipts are tampered with.
Solving the Problem of Trust – Smart Contract
This is where blockchain comes into play.
You will, therefore, use a computer program based on blockchain platform which will issue a certain number of tokens for a certain amount, i.e. say that you choose to issue one token for every $2 contribution – $2 being the minimum. This computerized agreement or deal is called Smart Contract.
Why is it smart? Well because such contracts once created cannot be changed. The smart contract or the computer program is not inside your computer’s hard disk, it is on the web, more specifically in the blockchain platform.
Second, the program replicates itself in all of the computers available in the network or blockchain platform. And therefore each and every contract or any transaction happened after that will have automatic numerous replicas made in other computers. This information is stored in blocks and linked in a chain, hence the name blockchain. So, the investors are trusting the computer program here, not you as you cannot manipulate the data and neither can they.
However, these do not completely solve the problem of trust. As seen, there are lots of scams happened where startups launched ICOs, issued tokens and raised funds, and then simply vanished with the money leaving the investors with the meaningless token.
ICO Scams around the World
Consider these points first –
- ICOs raises funds based on hype.
- They just need to present a seemingly viable whitepaper, but the more outrageous (yet logical) the idea is, the more interesting it is resulting in more hype and attracting investors
- ICOs don’t have any legal obligation or contract for that matter to actually build the product they have promised in the end
All these together open up the possibilities of criminal misconduct – creating fake ICOs counting on over-optimistic or naive investors sold by the idea. Since the creators don’t have to answer to anyone and the entire project is done online cheating people out is rather easy.
We would like you to check the following stats and facts regarding ICO scam.
The top 5 ICO scams till date are as follows –
|Scam name||Amount of money scammed|
|Pincoin and iFan||$660,000,000|
|Opair and Ebitz||$2,900,000|
Stat shows that for the last two years investors have lost about $100 million to firms that didn’t deliver the product they promised, neither they returned them money. A study made by Satis Group LLC, a New York-based premier ICO advisory company, in April 2018 revealed that about 81% of all the ICOs are scams.
The study also reveals that 6% of the ICOs were abandoned midway and refunded the investor money, whereas 5% didn’t make it to the exchange due to challenges. So the total failed ICO failure rate stands at a staggering 92%.
It has also been observed that the rate of failure of those projects which gives value into new cryptocurrencies is very high – with about 50% of all digital currency is now considered dead, meaning they are trading now at less than one cent.
Due to this huge scam rate as well as the amount of risk it posses, two Asian countries – China and South Korea have banned ICOs altogether. There is news that the ban on ICO in China might be temporary until an ICO regulatory guideline is in place. Apart from these two countries, there are other countries that have completely banned conducting ICO – Bangladesh, Nepal, Bolivia, Macedonia, Bolivia, Ecuador, Pakistan, Algeria, and Morocco.
Then there are countries like Australia, Canada which either has enforced ICO regulation or in the process. ICOs are heavily regulated in countries like the US, France, Russia, Thailand etc.
For the US, Though they have not banned ICOs, SEC monitor this form of raising money for projects very closely. SEC has even created a fake ICO website of their own to demonstrate the point to potential investors that how easy it is to get scammed.
Since hype generation is the power behind ICO’s success, it needs a lot of advertisement, and social media is the natural platform to do that. Therefore in order to fall into any complications, Google, Facebook, and Twitter have banned any kind of ICO advertisement on their platforms.
Though all these facts point toward ICO being a dead end with airdrop being a major hit, startups can raise a substantial amount of fund using their own digital currencies. The research of Statis’s Group shows that about 47% of the ICOs listed in crypto exchanges manage to hit their hard cap i.e. to reach their fundraising goal.
So the next question is how do you even spot these ICOs looking all good but are scams in reality?
How Do You Spot An ICO Scam?
With an 81% of ICOs being a scam, it should be enough for you as an investor to get demotivated in participating in a new project’s crowdfunding. But there are good ICOs out there, though just 19% of them, and if they manage to deliver on their promise then you will be richer.
We know it may sound difficult to figure out which one is a scam, however, there are a few things or point you can follow to avoid such fraudulent ICOs.
- The absence of Team profiles: The first thing to check is going to that new blockchain project’s website and dig for their team members’ profiles. Check if the ICO gives social profiles of its team members. At least one of their member should have a successful crypto project under his/her belt. If that ICO does not have social profiles of the team members, then it’s likely to be a scam. Once you get the names, you also should search them im various social media and LinkedIn. If you find them, see the next step, otherwise cut that ICO out of your list of interest.
- Missing or compromised escrow: Next, check if the ICO has an escrow account. If there is no escrow service offered, don’t opt for that ICO at all. The escrow (a third-party holding the fund raised) ensures that the creator of that ICO cannot simply vanish with the investor money, thus gives some degree of transparency to earn public trust. Also, you need to check how the escrow is going to release the fund. If it releases 100% of the funds to the project team after the ICO, then it’s not a good ICO to invest in. After the ICO is over, an ideal escrow should release the fund gradually, like 25% after the token distribution, 40% after the product’s beta release, i.e. on a milestone basis.
- Lack of technical details in the ICO whitepaper: If the above two points check out, then next glance through their whitepapers. A good proper whitepaper should have various charts, diagrams, specifications, calculations, and often times codes. If you can’t find these or enough of it then it is better to stay away from that ICO. An ICO coming up with a great and promising idea to disrupt an established industry and they don’t have these technical and operational details proves it is a scam.
- Feasibility of goals: No matter how bold yet seemingly doable claim an ICO makes, it should have an economic plan or roadmap to follow. If you can’t find such thing in their website or whitepaper it is best to leave that ICO. Note here that even though the project team has a roadmap, do your own research, e.g. comparing this with other past projects (as close as possible), and judge the feasibility of it.
- Missing code repository: This is another sure-fire way to spotting an ICO scam. Check if they have released or is going to release their codes to Github or other such public repositories. If they don’t, then avoid those ICOs.
So now you know how to spot the scams. We agree that it is risky, so maybe you are thinking that you better stay away from ICOs altogether given it is such a time-consuming task to sort out the bad apples as well as when there are airdrops which is risk-free. Well, let us assure you that there are a couple of very good sides to ICO, and you should consider those before making up your mind.
Why Would You Want to Invest in ICOs?
Let’s see now what are the advantages of participating in an ICO.
- Scope for Small Investors – As mentioned earlier, IPOs need big investments which rule out the small investors. ICO gives an investment chance to small investors as the prices of each token are set much modestly. This means you can buy the tokens at a very low price and therefore in larger quantity. And if the blockchain project does well then you can get huge benefits, both in return and value of the investment. This happens because the teams behind ICOs always follow a limited supply-demand philosophy which allows the value of those crypto coins to grow in the future, which in turn allows the initial investors to leverage on the investment and see profit in the multiples of the principle.
- No Boundaries – The best part of the ICO is that it international in nature. It does not matter from which country the ICO is conducted, you can be a citizen of any country (well, many ICOs ban people of certain countries) and participate in the token sale, i.e. ICO removes the geographical barrier for investors. This, as mentioned earlier, increases the chance for the business to grow about 20 – 25 times. This also has erased the line between professional investors and amateur traders, as anyone from anywhere can participate.
- Best Investment Returns – ICO is a good choice for getting early and fast benefits. More supporters or investors means more fund which leads to the prospect of greater return. These tokens now have a collective market cap of billions and keep increasing each day.
- High ROI – The chances of success is very high as for those successful ICOs the ROI (Return of Investment) is much high. Since the early-investors are generally the first users of the ICO tokens and these can be more tangible as securities, the ICO returns can also be 1000% or even more in the profits and give an option for portfolio diversification. In recent times, we have seen several ICOs gaining up in a huge value, such as Docademic which made a bump in over 10x and another is Storiqa.
- Decentralized System In traditional banking the investment is regulated and that is why your return value is controlled. Since the system is decentralized and therefore ICOs are unregulated mostly (yet to get invoked) and uncontrolled, no central government or body has any involvement in it. This creates individuality resulting in the investors to get much higher return and benefits. Also, this protects your investment against political or economic shocks.
- Benefitting with Early Coin Purchase – The escrow features and milestone feasibility of ICOs makes the fund transparent and verified as well as provide detailed clarification about how and where the ICO funds will be spent. Participating in ICOs allows you to invest In the starting phase of the companies, which gives you (early supporters) more liquidity and high chances of the rapid capital growth.
- ICO Mechanism Advantage – The ICO mechanism has multiple useful features. The ICO coins have the same level of anonymity like crypto coins. They can be easily sold or purchased at cryptocurrency exchanges if they are successful. These ICO coins also can be consolidated or subdivided. These are some of the advantages of ICO coins offer you.
- Additional Bonus – Having purchased tokens in ICO allows you to reap further benefit from the project in the future. There are ICOs who offer certain benefits like permit to buy additional tokens or buy those at a discounted price to their early investors
- Scope for exponential growth – We use these tokens to buy the services offered by the firm and when (and if) the cryptocurrency gains popularity and acquires the market trust over time, then there are high chances to use these for other purchase just like you do with bitcoin.
- Less Liquidity Period – ICO Token has a liquidity premium of over 1000x improvement in time-to-liquidity. If you consider an equity, you have to wait for 10 years before you can liquidate your seed investment. But in the case of ICO tokens, you can sell those within 10 minutes, well theoretically speaking. Actually, there is a lock-in period to discourage any short-term speculation exit. Still, the time you have to wait before you can liquidate your tokens is significantly lower.
Should You Invest In ICOs?
Now you know the advantages of ICO, but should you invest in ICOs and is it really right for you? Let us answer these question for you.
Be it any kind of investment, the investing styles vary from person to person. Everyone has their investment style depending on their level of understanding of the investment landscape as well as their financial requirements. So in the case of ICO investment as well, if you are in good financial condition currently, and you are also planning to join the ICO bandwagon to leverage on the increasing value of cryptocurrencies, then this is totally the right opportunity for you.
You should always follow the below four points before you decide to in ICOs:
- Set your financial expectations: The first and the most important step you need to take is is setting up your expectations from investments in cryptocurrencies or digital asset. Set a clear investment goal and accordingly create a workable purchase strategy for yourself.
- Research and get the knowledge of ICOs: The blockchain technology is relatively new and since ICO is based on that, you need to do a lot of research and thoroughly understand what you are investing into. Meaning complete vetting of the ICO is a must. You need to focus on the some these factors – background of the project team, the business model of the ICO, feedback of the community, product stages involved, and expert opinions.
- Legal risks: ICOs are not regulated, but in a few countries either it is heavily regulated or may come under certain regulation in the future. Therefore there are high chances the way ICOs are conducted will be different given that the high possibility of government bodies scrutinizing ICOs in future. So choose those ICOs that follow the regulatory guidelines of the government’s (of the country of origin).
- Only invest what you can afford to lose: This is the million dollar advice we can give you. Never fall for the craze and invest more money in ICOs or even cryptocurrencies than you can afford to lose. The best way is to start with a small (depending on your financial condition) amount and then move gradually forward.
Factors to Consider Before Making Decisions
So now if you are convinced that you should invest in ICOs, the next question is what are the factors that you should check out before deciding to participate in an ICO.
- Be Assured About The Project: Even after you filter out the scams, you still can’t be sure of an ICO’s success, and you cannot possibly know given that even IPOs crash despite showing the promising launch. So do your research, do your homework on that ICO so that you can believe that after its launch, the ICO project will not trade lower in the open market. If you can wait and buy an ICO at a cheaper rate, then it is not wise to buy it at all.
- Proper Attention Given: No one can give any guarantee about the success of any project idea but still, the intention and execution of it can be analyzed. So only when you can believe that the project will receive some level of attention and higher prices are naturally expected after it goes live, then only buy the tokens of that ICO.
- Position Sizing: If you are not going to risk a huge amount, sending just a little of your money or resources, then you may go for the ICO. We will advise you to invest only 1% of your total funds available in your account – it can be $1000 or $100000, doesn’t matter.
- Don’t just decide on Reputation: If you are not convinced by the project the idea but willing to do because of a person’s internet reputation, then even spending a small portion is not worth it. Unless you are not pretty sure of both the idea and the reputation, skip it.
- Have Loss Absorbing Skills: There are a lot of things that actually can go wrong financially. So it is wise for you to be mentally and financially ready to absorb the loss, and that’s why we ask you to invest only as much as you can afford to lose.
- Observing The Graph: At the initial stages of the ICO generally, the project developers do nothing and suddenly the chart rises one day. So you need your conviction here. This is when you have to actually assess how much the project is worth an investment as a rise is always followed by a downfall. If you see a sudden skyrocketing in price at the initial phase of ICO, we would advise you to sell the tokens since you are already sitting at a fair token price without even any product operation code written or implemented.
How to evaluate an ICO?
By now you probably have a fair idea of how you should evaluate an ICO. But let us show you exactly what to look for in ICO while evaluating its potential. The best way to do that is to analyze every single aspect of an ICO project so that you have a clear idea about its precise execution strategy. These are some of the critical factors you should consider in order to participate:
- Project Team: As was the case regarding finding out the scam, focusing on team members should always be your priority to form the base idea about that ICO. Find out whatever detail you can about the core team members, the development team members, and members of the advisory board. Check if the ICO has a team with a proven track record in the crypto and blockchain industry. The more members have past experience or related to this field the better it is likely to be
- ICO Business Model: The next thing but equally important you need to do is to Identify what are the strong points and weak points of the business model of that ICO. And look for answers of the following questions –
Do you feel that the firm really need an ICO with its own currency?
How does the project integrate its crypto-token with the proposed business model?
Do they let you use the token outside their ecosystem?
Make inquiries, as deep as possible, from people who actually understand the technology and discuss these questions with them.
- VC involvement: While looking for the team member profile, also check out if there is any VC involved and if there is who are the VC for the project. Are these individuals someone reputed and big? If the project has a VC onboard that is even better. So the having a big crypto VC is always a positive sign that the firm is taking their ICO very seriously.
- Community Feedback: Startups or firms announce their ICOs first on community forums and later they start their marketing. So you should always check the community feedbacks of the project and monitor how the project team is responding to it. Also, you should visit the Reddit, Facebook, or Twitter pages of the projects. Note here that there is a high possibility of paid reviews or bounty posts which pay participants to write and spread positive things about the project, so you need to be aware of those.
- Market niche: Now the next thing you should be focusing on is the market niche. Have a clear idea about what are the other projects in the same niche to get an idea about how intense the competition is or it can get. Researching on any previous projects or businesses working in the same industry, and matching their fundamentals with what your firm-in-focus is working on is a very good idea to have that idea.
- State of the Current Product: Those ICOs have higher chances of becoming successful which either already have a product nearing on completion or almost halfway down its development track. Hence, you should investigate the current stage of the project and find out if the project development team is on schedule or not.
How To Participate In ICO?
Now if you decide to participate in ICOs, then read this part of the article carefully.
Step 1: Do A Thorough Research on Upcoming ICOs
As mentioned in the last part, the first step you need to do is make a proper thorough research on ICOs. Though some points look repetitive, we want to stress on those earlier discussed to make sure that you understand the importance of it as well as to maintain the flow of the topic at hand.
- Assess The Team Members: Assess the team composition thoroughly, especially the development team and advisory board. Search for their profiles on google, check their LinkedIn profiles, then list out all the positives and negatives of the team. AS mentioned, find out whether the company has any crypto experience, especially in the field of cryptocurrencies since this is about a token.
- Check Various Stages Of The Project: Skim through their website to find details about the stages of the project. Search for the project whitepaper, check if they have operational code especially if there are a few lines of working code available, and if the team has the plan to release a beta version planned.
- Analyze The Investment Of VC: We have made it clear the importance of Venture capitalists attached to the project. Given their experience in investment, Ventures Capitalists generally invest in projects that are very useful from early stages. Here you are basically trusting on their knowledge and experience. So go through the project’s website and dig out all the details you can find on its VCs.
- Trust The Bitcointalk.org Thread: The Bitcointalk.org thread is probably one of the most useful platforms you can find for discussing any issues related to cryptocurrencies and therefore issues related to ICOs are discussed quite actively. You can directly ask the developers, and in case you are not satisfied with their answer, or avoid your question you should not participate in that ICO, period.
- Evaluating The Whitepaper: The whitepaper is the most important piece of the document since it has all the details about the project. There are many investors who just take suggestions from threads, people, or other source but rarely actually go through these details. Read most of the paper and take notes in case you need to compare similar projects. The whitepaper is the first source to see for yourself if the project has the value you are looking for.
- Use Whitelist ICO As A Filter: An ICO is called whitelisted when that ask you to do advanced registration to participate in the event. Usually, this is the hallmark of a huge or popular project that offers only a limited number of crypto coins.
- Look at the outlets or websites: Always use various other websites and threads as your measuring gauge. These sites give a very detailed insight of all the ICOs in the crypto market including the latest one and help you connect the dots for a particular one. There is no need to fear of missing out an ICO as every day there is on an average 2.5 ICOs are conducted. Don’t be hasty in taking a decision, keep a close look at upcoming ICOs would help you have better plans. The following websites are a good source to keep yourself updated on upcoming as well as ongoing ICOs –
- ICO Watchlist – a highly recommended site
- ICO Data
- ICO Rating
- ICO Alert
- ICO Tracker
- ICO Bench
- ICO List
- Coin Schedule
- Crypto Smile
- Community Sources or Forums that have ICO discussions
- Bitcoin Talk
- Have a Review of The Quality of the code: In case you know a programmer or have a little programming knowledge yourself, then you should assess the quality of coding of the developer – analyze their code, look at the level of consistency in the code, how experienced the developers are. The idea here is to avoid messy developers which can result in a failed project.
- Make Logical Discernmentation: Social media is a very good way to have a logical discernment about such projects. But, as said earlier, don’t fall into the trap of false positive reviews or bounty posts to hide the fact how hollow the project may be.
Step 2: Process Of ICO Participation
- Create an Exchange Account: Once you have done the necessary research and have decided to participate in the ICO, then the next step is to open an exchange account. Though there are thousands of exchanges available for trading pick one which offers fiat-accepting cryptocurrency exchange account so that you can convert your crypto coins with fiat currency and vice-versa. On this note, we would suggest you trade in multiple accounts since most of the exchanges are third-party exchanges that are operated by humans.
- Own A Crypto Wallet For Participating In ICO: A wallet is where you keep all your crypto coins and it is an absolute must for you to use the most secure wallet you can afford yet offer you the kind of flexibility you need. There are a different type of wallets available for users, mainly differentiated by hardware wallet and software wallet. Though almost every exchange account has their own wallets, yet it is strongly recommended not to use them since it is handled by humans and therefore poses a potential threat to your funds. ICO generally accepts Bitcoin or Ethereum from your private wallet. If you send crypto coins from your third-party wallets, there are chances that you won’t get a token as exchange’s wallet is not yours. If you want to have an idea which type of wallet you should use, check out earlier published article on crypto-wallet. A wallet is a place where you’d keep your currencies.
- Follow The ICO Instruction Guide: Most of the ICOs generate a proper guide containing a direction to participate in their crowdsale. So you should always follow their guide and be a part of the ICO discussion. Also, you should join the project’s official communication channel to get regular updates on the ICO.
What Are The Reasons Behind Enforcing ICO regulations?
As ICOs got popular with its exponential growth, it attracted the attention of various governments. Though they may have their own agendas, they do have some solid grounds to monitor it very closely and intervene in it, eventually enforcing a various degree of regulations on the way it is conducted. The main four reasons are –
Since ICOs are unregulated, there are no set guidelines they need to follow, therefore resulting in an abundance of anonymity and a certain level of lack of transparency involved in the process. And given how much scams have happened in the past, we can say that ICOs is an uncharted territory for those who try to track down a various stream of money, getting in and out of the system.
Remember the Darknet which is always heavily suspected of supporting illegal online activities. The lack of regulations means it has all the potential to be the breeding ground of criminal activities. Also since crypto offers full anonymity (barring a few cases where you have to submit KYC), crypto trading potentially allows terrorists to move a huge amount of funds across geographical borders without anyone’s knowledge.
Protecting the Investors
ICOs have all the necessary ingredients for manipulating people and it is very easy to apply all sorts of fraudulent schemes. Given the huge sum of money involved, the Governments and other International financial organizations have obligations to protect the interests of ameature as well as corporate investors.
Undermining the Investment Culture
Crypto trading has a completely different direction than our traditional trading and the various practices of crypto trading used by the traders have raised concerns among traditional institutions. There is a Gold Rush type of attitude of trading observed forming over ICOs and this creates a lasting adverse effect on the financial industry in general, given that it is unpredictable nature.
ICO regulations by countries
Given the past history of scams and stat reported by various investigating media, ICOs, in general, are treated with a various degree of cautions in every country. You will see that though there is a various level of regulative measure being employed nowadays, AML (anti-money-laundering) and KYC (Know Your Customer) principles are mandatory criteria for conducting ICOs in every jurisdiction or country. While there are countries much more relaxed to ICOs, requiring just a basic set of compliance with regulations governing cryptocurrency trading, there are countries that have completely banned conducting ICOs.
Let us now check what is the status of ICO regulation in various countries in the world. The following data is taken from Bitcoinmarketjournal.com.
Countries Allowing ICOs
The following countries do allow ICO but there certain regulations against altcoin use.
The countries which completely allow ICOs includes Saudi Arabia, Lebanon, Turkey, Cyprus, Hungary, Croatia, Austria, Czech Republic, Romania, Poland, Slovakia, Slovenia, Belarus, Ukraine, Denmark, Estonia, Bosnia and Herzegovina, Bulgaria, Greece, Italy, Malta, Belgium, Ireland, Netherlands, Portugal, Spain, Brazil, Chile, Colombia, Trinidad and Tobago, Nicaragua.
Now let’s check those countries which allow ICOs but with some small restrictions in place.
Canada – The Canadian Securities Administrators have ruled that those ICOs and altcoins fall into the category of securities are subject to regulations on a case-by-case basis. The authorities there have developed a “regulatory sandbox” to regulate fintech projects like ICOs which would not generally fit in the national regulatory scheme.
Canada recognizes altcoins as intangible assets and it is expected that Canada will register commercial altcoin dealers and regulate as money service businesses in the near future. Several largest banks of Canada have put a temporary banking ban on altcoin purchases.
Estonia – Though Estonia is currently considering to start its own ICO to raise funds, but there are numerous opinions as the Eurozone rule on nation states does not allow their own currencies. Estonia has a supportive legal framework for ICOs. Only if the ICO tokens qualify as securities then only the ICOs will be registered with the Financial Supervision Authority (FSA).
Germany – Though there are no specific regulations for ICOs in place in Germany, but ICOs are expected to adhere to existing regulations, including those stated in the Investment Act, Banking Act, Payment Services Supervision Act, Securities, and Trading Act, and Prospectus Acts.
But the Federal Financial Supervisory Authority of Germany has already issued a warning regarding the risks involved in of ICO investments. As per the statement, ” Due to the lack of legal requirements and transparency rules, the consumer is left on their own when it comes to verifying the identity, reputability and credit standing of the token provider and understanding and assessing the investment on offer. It can also not be guaranteed that personal data will be protected in accordance with German standards.”
Israel – In Israel, altcoins are treated to a 25% capital gains tax. According to the law, miners and altcoin traders there have to pay both a 17 percent value-added tax (VAT) and corporate income tax.
South Korea- Though South Korea is regarded as an avid supporter of cryptocurrencies, the country has zero-tolerance for malicious ICOs and has banned ICOs altogether in order to protect its own people. The population accounts for one-third of the global daily Ethereum trading, while the country is ranked third on the list of Bitcoin-trading nations. There is no explicit ban of altcoins currently in South Korea, but altcoin futures and derivatives trading are banned.
Taiwan – The Central Bank of Taiwan has issued warning against the use of altcoins to its banks and banned altcoin ATMs altogether. But, three of the four major convenience store chains allows purchasing altcoins.
Lithuania – The Bank of Lithuania treat altcoins are lawful, but advises against it
Iceland – Though earlier altcoins were banned, altcoins were exempted from the Foreign Exchange Act on March 12, 2017,
Finland – Altcoins are treated as private contracts and therefore are subject to taxation.
Norway – Altcoins in Norway is treated as a taxable asset, which is subject to wealth tax.
Kyrgyzstan – The use of altcoins as a currency for domestic use is prohibited there.
Jamaica – Jamaica has publicly announced that it supports and recognize altcoins as a potential opportunity of growth.
Cambodia – Similar to other nations, Altcoin use there is discouraged.
Vietnam – The country has prohibited to use altcoins as money, but there are no laws banning altcoin trading.
Indonesia – Though it is not legal to use altcoin as money, it is allowed to be used as a commodity.
Costa Rica – Altcoins have been announced to not have the government’s backing, but to also not be illegal.
Argentina – Argentina recognizes altcoin as money, though not as legal tender.
Nigeria – Algeria banned the use of virtual currencies on December 28, 2017. The Central Bank of Nigeria has come out to correct the perception that it banned altcoins in the country. The Central Bank’s position is that – as it cannot regulate the Internet – it cannot regulate altcoin use.
South Africa – South Africa treats altcoins as intangible assets.
Namibia – The Bank of Namibia has banned the altcoin exchanges and does not accept altcoin as payment. But they do not have the force of law.
Zimbabwe – The Zimbabwe government has taken no official position on altcoin, despite showing skepticism. Altcoins are currently being traded in the country.
Countries Allowing ICOs With Some Or Future Regulation
Now, let’s check the countries which allow ICOs but have regulations or may put some regulations in the future.
until November 13, 2017, the EU legislation used to be extremely ICO-friendly, but then declaring ICOs as high-risk investments, the Securities Market Authorities presented a set of documents putting stricter regulations on ICOs. There are a number of statutory requirements to be met by those companies performing ICOs, including Anti-Money Laundering (AML) and Know Your Customer (KYC) policies, licenses etc.
Countries like the United Arab Emirates, Iran allow ICOs but they subject to future regulations
The UK has always been ICO-friendly. UK’s stand has been that since ICOs are experimental in nature, before getting into it investors should fully understand the risks involved and therefore act at their own discretion.
Like most of the other major nations, the UK has also issued a warning to the investors on the unregulated nature of ICOs. The stance of the Financial Conduct Authority (FCA) is that even though the ICOs are acting in good faith now, there is still a good chance that investors may lose their entire investment. The FCA stated, “Typically ICO projects are in a very early stage of development and their business models are experimental”.
As for the altcoins, the UK recognizes it as “private currency.” The ICO operators are free to interpret existing laws and regulations as they see fit for their own properties. As per the reports, UK is testing out ICOs and altcoins in its “regulatory sandbox” and new regulations may be out soon. Several of UK’s bank has banned the purchase of altcoin.
It is one of the best places for both cryptocurrency businesses and crypto-investors. ICOs there are allowed but subject to future regulations. As of July 2018, Switzerland has planned to conduct a huge audit of ICO across the country and figure out a set of regulations which will ensure that ICOs are reliable and secure financially.
Though the recent attempts to regulate every ICOs have failed, the need to codify protections may initiate the regulation efforts again. The Swiss Financial Market Supervisory Authority (FANMA) has started to investigate all ICOs for any possible breach of securities laws. It is actually can be considered as the first signs of a rather new wave of campaigning for regulatory oversight. But regulations cannot stop the current momentum to incorporate ICOs into Swiss culture.
Japan is extraordinarily active in the crypto market and has several major exchanges. Japan is in the process of nation-wide ICO regulations which will enforce AML and KYC requirements and will also classify ICOs depending on their business model. The Financial Services Agency of Japan is also looking at certain regulations that may help to strengthen this AML/KYC protections for altcoins. This warning on ICOs has also given the open fear of a potential crackdown on altcoins.
ICOs are allowed there but are subject to future regulations. Altcoins in Sweden are not subject to a VAT (value-added tax) but are otherwise a subject to the Swedish Financial Supervisory Authority and the decision is currently under appeal, as of July 2018.
Isle of Man(UK):
ICOs are allowed though subject to future regulations. The Isle of Man has indicated that it is seeking to forge regulations in the future that will establish and protect ICOs’ legal status.
ICOs are allowed but subject to future regulations. Regulators are planning to offer regulations for ICOs by January 2019 in hopes of permanently codifying legal protections for the altcoins.
The country allows ICO operations but it may get subjected to future regulations.
Hong Kong (China):
It allows ICOs but it is highly likely to be subjected to future regulations. For certain altcoins regulators have proposed it to be securities and should be treated like that only.
The country also allows ICO event but may subject it to future regulations Regulators in the Philippines recognizes bitcoin as a valid form of remittance payment, but Philippines government feels that regulations addressing KYC/AML protections may also be needed. Also, firms who are offering exchange services there are now required to register.
Australia is one of the first countries who formally launched ICO regulations. Australia requires all ICOs which involve combined investment to abide by the Corporations Act. It asks them to keep track of those shares if the ICO issues shares, as well as to issue a disclosure document and acquire a financial services license in case the ICO offers financial advice to customers. But the country has issued draft laws that would allow the establishment of a regulatory sandbox for FinTech startups which will allow these firms to operate without being fully licensed.
This is another country where ICOs are allowed yet have normal regulation in place. Altcoins are recognized to be virtual assets governed by Mexico’s FinTech Law.
Now, let’s check those countries which allows ICOs but heavily regulate it.
Countries Allowing ICOs With Heavy Regulation
Both France and Luxembourg allows ICO but heavily regulates it.
Since the US has a difference over the definition of cryptocurrencies as securities or commodities, so there is a division of opinions over ICO regulations as well. In the US, the ICO rules vary widely from state to state – where there is no regulation over ICO in some states, some states require firms to deposits in equal to or in excess of all local transactions, and other states asking for a license to doing businesses in altcoin.
There are no current regulations banning ICOs specifically on the federal level, though ICOs are expected to be registered and licensed the same as if they were not ICOs. This includes registering with the SEC if the ICO is to sell or trade securities. The SEC has recently found that some altcoins may be securities, and as such, may be subject to the SEC’s ruling in the future.
Some SEC commissioners opinionate that most ICOs are securities and therefore should be treated as such. All ICOs are expected to adhere to AML/KYC practices and if not adhered to, an ICO is then open to legal action or possible seizure at any moment. The US has also treat celebrity endorsements of ICOs as illegal unless all the compensation involved are disclosed.
There is a ban on altcoin purchases by several of the nation’s credit card processors and major banks. Bitcoin and other major altcoins are treated in the US as a commodity, thus making them the responsibility of the CFTC. On the other hand, future tokens are classified as securities and fall under the SEC’s jurisdiction. However, ICOs are allowed under the condition of registering and licensing the company and, if security trading is planned, obtaining a special license from SEC.
Jordan – It allows ICOs but it is heavily regulated. Banks and financial institutions of Jordan are banned from using altcoins.
Russia – ICO is allowed there but are heavily regulated. In October, the Russian government issued five orders enforcing altcoin-miner registration and taxation, the application of securities laws to ICOs, and the use of altcoins to create a “single payment space” in the Eurasian Economic Union to oppose the Eurozone. The position since then has shifted to altcoin use being “probably illegal.” However, there has been no shift in official policy.
Singapore – Allowed, but heavily regulated In November, the Monetary Authority of Singapore offered a guide on Digital Token Offerings, which indicated how altcoins should be treated under current securities laws. The new guidance dictates that any ICOs or altcoins that are “capital market products” under the Securities and Futures Act can be regulated under the MAS. This includes altcoins that either infers an ownership interest of a corporation or product, debt, or a share in an investment scheme.
Thailand – Though ICOs are allowed in Thailand but are heavily regulated. Financial institutions in Thailand are prohibited from investing or trading in any altcoin, exchanging altcoins for fiat money or for other altcoins or commodities are not allowed. This ban also includes creating a platform for altcoin trading, allowing altcoin purchasing via credit cards, and from advising about altcoin investing or trading. Still, it seems the Thai government is to up for banning altcoin trading.
India – ICOs are allowed in India but are heavily regulated and usage of altcoin is heavily discouraged by the government. Recently they have closed an ATM of Unocoin and arrested the officials. The Reserve Bank of India (RBI) has prohibited the use of altcoin in the banking system.
Countries Who Has Banned ICOs
Finally, let’s check the countries which have banned ICOs in their soil.
China – The People’s Bank of China has banned ICOs for all businesses and individuals. Those Chinese ICOs who have completed their funding cycles have been asked to refund any altcoins raised. The PBoC has indicated that it will investigate anyone or firm found to be in violation of its rule. It has targeted even the trading of all altcoins there though officially individuals can still be allowed to hold altcoins.
Macedonia – It has banned the Use of ICOs and also altcoins as payment. Violation of any sort there may result in imprisonment instead of just the customary fines.
Ecuador – Ecuador has also banned Altcoins and ICOs since the country is developing a national altcoin of their own in a hope to take away the nation’s dependency on the American dollar.
Pakistan – Pakistan has banned ICOs altogether. The State Bank of Pakistan has also banned altcoins trading in all organizations and institutions in direct response to India’s stance towards cryptocurrency, though the ban will not be enforced judicially.
Algeria – The country has banned ICOs altogether. Algeria banned the use of virtual currencies on December 28, 2017. Per Algerian Law, “The purchase, sale, use, and holding of so-called virtual currency are prohibited. Virtual currency is that used by internet users via the web. It is characterized by the absence of physical support such as coins, notes, payments by cheque or credit card. Any breach of this provision is punishable in accordance with the laws and regulations in force.”
Morocco – Another country that has banned ICOs.
There are other countries like Nepal and Bangladesh who have also banned ICOs.
Now let’s turn our attention to the evolution of ICO over the last couple of years
Importance of Ethereum Blockchain For ICOs
When discussing ICOs the importance of Ethereum cannot be overlooked or discussion is not complete without clearing the role of Ethereum out in ICO’s rise.
Ethereum Blockchain is the one which first introduced smart contracts (the automated self-executing contracts) to the crypto world. The innate problem with ICO is trusted and the smart contract feature got rid of that trust issues of ICOs. That is to say, you will always get your token if you pay in Ether. As mentioned earlier Escrowing feature also helped ICO cement its position as a reliable investment event, while still allowing some legal standards to be skipped.
On top of smart contracts, the Ethereum team introduced the token system that exists on the Ethereum blockchain parallelly to the Ether. To create an ICO token on the Ethereum blockchain, the firm should adhere to the defined set of rules and functions, and therefore such tokens are called ERC-20 token (Ethereum Request for Comments) standard.
Instead of building a new blockchain from scratch for every project just like on Bitcoin blockchain, Ethereum allowed firms to just build their own tokens. The firms just grab this feature of tokens because the ERC-20 token are –
- Quick and Easy to Build – All these firms need to do is take any of the already existing tokens, as close a fit to their project profile, and make the required adjustments they need. This not only gives the firms a personalized token of their own but also a contract ready to be used as an escrow and trading point.
- Secure and Decentral – There is no need to introduce mining to secure the newly created blockchain since the Ethereum blockchain is already secured and decentralized.
- Ecosystem Friendly – In addition, Ethereum offers hundreds of tokens, various dapps and systems to interact with quite easily. All you need to do is team up and merge multiple token functionalities.
But if you think that with so much to offer Ethereum is the only player on the crypto-board, then you need to do your research right! Just kidding, we are here for you. It is just that Ethereum started early and there are actually several other platforms for ICO who are just catching up, but rather fast. Some ICO platforms offer cheaper transaction fee than Ethereum but maybe with lesser functionalities or different code languages.
Some of these platforms are Waves, NEM, NEO, Stratis, Lisk, Qtum, Ark, Neblio, Minerium, NXT, DeepOnion, Cardano etc. But for big projects, they will need their blockchain of their own with their own set of rules.
The Next Step in ICO evolution
It is evident from what we have discussed so far and what the current market of ICO is looking like, we believe that the fate of ICO is heading towards a future where the following things are very much likely to happen –
- Stricter Regulation: It is expected that regulation across the world will get much stricter and a legal ICO framework will eventually develop. This may spring some unexpected new changes. If these go eventually ICO may replace IPOs and it may happen that big hedge funds will join the crypto verse.
- Milestone-based Funds Releases: Most projects don’t need the funds generated from ICOs on day one of the events. So The funds can be programmed (escrow feature) to get released in installments, according to the milestones mentioned in the roadmaps. To avoid product developers to just run off with the funds, including more third-party arbiters or community voting to unlock the funds is the next step forward as security features of ICOs. As the year will pass, the security level will keep improving as well too.
- Implementing Structure Like A Stock company: As you know ICOs don’t offer a share of the company or equity-like IPO do, well there are very few actually. We think that though that is may not be the goal of crypto firms, eventually more and more legal and straight profit-sharing ICOs may emerge with a good legal framework to support it.
The Evolution of ICO Marketing Campaigns
We will discuss here how much ICO campaigns have evolved over the last 2-3 years, especially 2017 was a rather interesting and wild year for ICO. Let’s check what are the various tools and technique ICOs have employed in recent years to market themselves. In no particular order of emergence, there are as follows –
- Announcement Threads – This is the method where all you have to do is just go to a suitable forum of your choice, post something interesting about your project, and then wait for investors to join.
- Bounty Threads – This probably the cleverest inventions of ICO which offer various rewards in the form discount or token and mass market your crowdfunding.
- Create or Own Forums – It is very easy to create and run a forum, and crypto project teams employed exactly this method as their main communicational channel for the community as well as discussing new features and ideas.
- Landing Pages – An attractive professional looking website showcasing information posted on the forum is another tool all ICO team employs.
- Telegram Channels – If there is any other thing that overcame the popularity of forum in case of ICO, then that would be Telegram Channels which are now regarded as the golden standard for communication between the community, ICO founders, and potential investors. This is because setting the Telegram channel is very easy, a miscommunication there is no longer spammed away, and Telegram is just more serious and professional.
- Team-focusing – These days ICO startups are needed to explain to investors why they can do what they are promising they will do.
- Prototype – As of September 2018, data says more and more investors have started to demand something more than a concept. For example, they would like to see a working prototype.
- Whitepapers – People has started taking whitepapers more seriously as they present the project’s business plan to the interested ICO participators. This makes some ICO whitepaper very detailed and often full of complexity, depending on the project type.
- Legal Forms – As stated earlier, investors were more often scammed as they fall in a trap in the promise of more in return. So you should always have some due-diligence or at least have a way to reach out to the people. Hence nowadays, if a project doesn’t have at least one company in founding, it is marked as a scam.
- Pre-Commitments – Nowadays, firms need to give pre-commitments such as a letter of intent or investment or, monetary resources from the founding team. Trust will always play a crucial role in investing.
Token trends are keep bouncing between security and utility types. Though there are some projects who try to offer dividend tokens or shares, they don’t even have a legal firm in most cases.
Services Offered by ICOs
Next, we would like to discuss the different services offered by ICOs which will help you as someone who wants to launch an ICO as well as an investor to understand the anatomy of each initial coin offering.
These ICO Services are –
- Content – Creating engaging whitepapers and press releases, drawing various interesting graphics for the articles and website, creating attractive ads and banners etc.
- Programming – The main role of programming is to develop the landing page and smart contracts. This is the foundation of any ICO and in case of a new blockchain creation, the scope is much bigger.
- Marketing – The task of this department naturally is to bring the press releases to the front in crypto as well as non-crypto websites, then developing a roadmap for hype. And getting the content out there.
- Socials – Managing things like telegram chats, answering all other the social media and forum queries and keeping the ICO busting with activity are the responsibility of this department.
- Advisory – Their role is likely to offer strategic ICO consultation but they also help to conduct the blueprints for the blockchain. Sometimes there are fake advisors and team members as well though, i.e. people only in pictures on the website with a good looking LinkedIn profile but actually not.
- Legal – There are lawyers who advise the team on the token model and therefore help construct a firm which can get the funds of ICO in a legal way. ICO firms normally have a parent firm to make all the developments once the fund is released.
We know the guide is quite exhaustive, and even then it is not enough to cover all aspect of the ICO. But, given that earlier we have covered top ten ICO projects before, we thought this particular content will educate you more on investing.
Read the article, make some notes, we hope that this will immensely help you the next time you decide to be that investor and participate in ICOs.