Category Archives: Initial Coin Offering

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ICO Fundamentals: Empowering or Misleading Investors?

ICO Fundamentals: Empowering or Misleading Investors

The year 2018 saw the dramatic decline of the initial coin offering (ICO) market. January began with an outstanding USD one and a half billion invested into ICOs, with this figure trickling down to less than USD 200 million per month as the year closed. 

So, what killed the booming ICO industry? In large part, the US government crackdown and the relatively poor performance of the cryptocurrency market seemed enough to scare off investors last year.

Token offerings are an innovative way for startups with solid proof of concept to raise capital should the option of collateral needed to take out a business loan be lacking, or the lack of contacts or skills needed to secure capital from institutional investors.

Through the examination of recent studies from both academics and journalists, it can be observed that the biggest threat to the industry is posed by irresponsible startups that are either reluctant to keep investors fully informed, or purposefully misleading them. If the ICO market can be regulated in a way that avoids stifling innovation, it is suggested that the token model can become the most dominant form of venture capital financing.

Transparency, Truth, and What ICOs Need to Survive

One theory presented by Jiri Chod and Evgeny Lyandres suggests that investors have as much to gain as do the entrepreneurs holding the ICO – as long as there is no disparity of information available to the investors, however. And that would seem to be one of the most predominant issues cited against startups holding ICOs; offering false or exaggerated promises of returns, or whitepapers full of fraud and plagiarism.

Indeed, the Wall Street Journal investigated the details of 3,291 whitepapers pertaining to ICOs, finding that over 2,000 of them included terms “nothing to lose, guaranteed profit, return on investment, highest return, high return, funds profit, no risk, and little risk,” language that has previously led US state and Federal regulators to issue cease and desist orders or file charges. Some 16% of the whitepapers were found to show evidence of either plagiarism, identify theft or the promise of ”implausible returns.”

Many see government regulation of the sector as an appropriate way to manage the risks posed to investors and hold startups accountable to their claims. Chod and Lyandres theorize that if this is the case, ICOs have the chance to ”dominate traditional venture capital (VC) financing.” Others, however, argue that too much intervention would likely stifle innovation in the sector. US-based cryptocurrency exchange Kraken has said that the cost of handling subpoenas is becoming a ‘‘barrier to entry” for new exchanges. 

Chod and Lyandres concludes: ”An implication is that while regulating ICOs is desirable, banning them outright is not.”

The Role of Tokenomics

Another academic paper that delves into tokenomics is authored by Lin William Cong, Ye Li, and Neng Wang entitled Tokenomics: Dynamic Adoption and Valuation. It outlines a model that can be used to predict the future growth of tokens that act as a means of payment on their native blockchain platforms, with the premise of an argument centered around the notion that the expected popularity and technological progress of the project renders the token as an ”attractive store of value,” .promoting further adoption.

Again, during the ICO stage, a parity between investor and startup in terms of the project’s realistic roadmap is required in order for this model to successfully play out.

The paper also outlines some of the benefits blockchain platforms can enjoy by using a token economy: ”Tokens… can accelerate adoption, reduce user-base volatility, and improve welfare.”

The US SEC Crackdown: Warranted or Not?

While the US Securities and Exchange Commission (SEC) has received criticism for its actions against ICOs last year, examining several of the public cases individually shows that perhaps the actions of the government agency were necessary in order to keep investors fully informed on their decisions, as the research shows that it is required to promote a healthy ICO market.

In the case of AriseBank, the SEC halted the ICO after proving that the startup had falsely claimed to be FDIC-insured bank which would have allowed the decentralized bank to offer customers FDIC-insured accounts. The SEC cited that AriseBank had ”used social media, a celebrity endorsement, and other wide dissemination tactics” to raise a claimed USD 600 million of its USD 1 billion goal in two months.

One of the benefits of ICOs cited by Chod and Lyandres is the unique ability of tokens to allow entrepreneurs to shift some of the venture risks onto investors without compromising their own control rights. This could be the biggest benefit of token offerings for startups, but for it to revolutionize venture capital financing in a way it is capable of, investors need to be made aware of the risks by entrepreneurs.

2019: What to expect

The future of ICOs in 2019 depends on three major factors: US regulation, transparency from startups, and the market performance of major cryptocurrencies.

Chairman of the US SEC Jay Clayton himself has said ”ICOs can be effective ways for entrepreneurs and others to raise capital,” so long as you adhere to the regulations set by his agency at least.

Tokenomics is a cutting-edge theory with the potential to revolutionize the structure of business development and entrepreneurship, but for it to live out these prospects, right now, startups would be advised to professionalize their whitepapers and start playing by the rules at least until the industry can prove it has matured.

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Korean Blockchain Association Argues to Legalize ICOs to Boost Startups, Save Crypto Exchanges

The battle to for global blockchain supremacy rages on in South Korea as the head of the Korean Blockchain Association makes further calls to legalize initial coin offerings (ICOs).

Economic rhetoric

Chin Dae-je, chairman of the Korean Blockchain Association, made a strong case for the presently banned fundraising method whilst speaking at a National Assembly Library seminar in Yeouido, western Seoul.

Believing that ICOs are the key to creating new jobs, boosting the economy and producing innovative world-leading blockchain startups, the chairman said:

“The government should implement guidelines to nurture the domestic blockchain industry, which will help Korea emerge as a global industry leader… Startups who comply with guidelines should be allowed to launch ICOs.”

ICOs have been a point of contention in many nations as they struggle to classify and regulate cryptocurrency tokens. Furthermore, ICOs have a muddied history of scams and fraudulent activities that caused knee-jerk responses from many governments such as the United States and South Korea, who banned ICOs or made them incredibly difficult to launch.

While investor and consumer protections have been at the crux of the contentious debate, so has the stifling of domestic blockchain enterprise and innovation in South Korea. According to the report, disallowing domestic ICOs has resulted in startups setting up shop in jurisdictions that accommodate ICOs such as Hong Kong, Japan, and Thailand.

Despite this claim, South Korea is home to a robust blockchain market with major investors and traditional companies beginning to enter the space and drive innovation. In addition to this, city governments, as well as national government entities, are largely in favor of backing the technology through public sector pilot projects, funding, education, and implementation.

Team effort

The Korean Blockchain Association is no underdog however in its mission to legitimize ICOs; in September the governor of the Financial Supervisory Service called for an international standard for ICO and cryptocurrency regulations.

Furthermore, the Committee Chairman of the National Policy Committee spoke at the Korean National Assembly, furthering the argument that the present stance is causing global competition to get ahead.

As reported by local media outlet Korea Joongang Daily, Chin said, “By regulating and allowing ICOs, we can nurture start-ups with high potential, create jobs and reduce youth unemployment […] We can designate public or private organizations like the Korean Blockchain Association to look over the ICO white papers and verify the purpose of their fundraising.”

During his proposal, Chin offered up his organization as well as suggested other public or private entities as potential regulatory bodies that would oversee the verification of ICO whitepapers.

Trouble in tandem

Also backing cryptocurrency exchanges, Chin proposed for the government to make it easier for exchanges to set up new user accounts for Korean fiat deposits and withdrawals. He believes that should an exchange adhere to an approved standard of security measures, it should be allowed to “issue new virtual accounts”.

Chin considers these issues to have a knock-on effect to one another, arguing that if domestic exchanges disappear, then local startups seeking to gain funding through ICOs will be up against significant financial challenges and would result in domestic cryptocurrencies being listed on to foreign exchanges.

Highlighting the present impacts he said, “Korean exchanges that were ranked as the fourth or sixth-largest in the world before are dropping to below 20th place now.”

Also speaking at the seminar was Democratic Party representative Min Byung-doo, who has been backing pro-blockchain legislation. He said, “We cannot completely close the door on ICOs… The government needs to promote the blockchain industry by cooperating with the National Assembly and blockchain associations to curb scams, speculation and money laundering.”

 

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South Korean National Policy Pushes to Legalize ICOs

The Committee Chairman of South Korea’s National Policy Committee has spoken before the National Assembly and called for the legalization of initial coin offerings (ICOs).

ICO contention

Min Byung-Doo, also a member of the ruling Democratic party, spoke at a session of the National Assembly on 2 October, where the national administration is subject to questioning from lawmakers.

According to a local media outlet, Byung-Doo was adamant that “Korea should also allow ICOs”, adding that appropriate regulations would work especially should the crypto industry self-regulate and introduce safety standards that can protect against fraud and money laundering.

However, the government is still reluctant to alleviate its tough stance on the funding method. Chief of the Financial Innovation Commission (FIC) for the Financial Service Commission (FSC), Son Hyun-do, said that ICOs were difficult to permit due to “social-pathological phenomena and the possibility of price manipulation”.

Others such as policy adviser to the Justice Department, Lee Jong Keun, said last month at a parliamentary debate, “We must keep strict institutional regulations consistent with the dangers of cryptography.”

Competitor

Nevertheless, there are other members of the FSC who have taken a similar stance to Byung-Doo and urged the government to get legislation and regulation bills passed quickly.

Byung-Doo made the case that the ICO ban was dampening South Korea’s ability to compete on the global blockchain stage effectively.

With regards to the nation’s presently booming blockchain industry, he said: “Blockchain-related industries were at the top of the world in terms of competitiveness, but the competitiveness in ICOs has dropped sharply. Now, 75% of projects in the industry belong to the United States only, which is the world’s top competitor.”

Byung-Doo also referenced two of the largest ICO funding rounds in recent memory, presenting them as economically beneficial, saying, “We can see that the flow of investment is clearly changing compared to ICO and angel fundraising. The ICO [method] has raised USD 1.7 billion for Telegram and USD 4 billion for Block.One, it is getting bigger and bigger.”

As ICOs continue to be a global trend, the lawmaker does not wish to see South Korea fall behind, which could happen should prohibition of token sales continue.

A matter of time?

South Korea’s National Assembly has been host to several discussions surrounding blockchain, cryptocurrencies, and ICOs. The growing sense of urgency is likely derived from its consistent push to adopt blockchain technologies.

In recent months, South Korea has seen the establishment of the Blockchain Law Society, an entity that aims to advance legal and regulatory proceedings with the intention of also studying the technology and “promote interdisciplinary collaborations between diverse areas”.

Other facets that support the technology at all levels in the nation have been emerging this year. This included tax breaks for blockchain startups, education efforts, gigantic governmental funding for innovative technologies and enterprises and significant backing from the Ministry of Science and ICT.

Most recently, it became clear that blockchain was to grow in South Korea with institutional investors and domestic companies entering the industry. With big money in play and many other plates spinning such as the Jeju Island proposal, Byung-Doo’s stance is generously backed by positive evidence.

 

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Study: Ethereum ICOs Have Cashed Out as Much as They Raised

A report published by BitMEX on Monday shows that blockchain startups hosting initial coin offerings (ICOs) and raising funds in Ether (ETH) have now cashed out just USD 11 million short of what was raised.

The research indicates that the 222 startups that were tracked managed to raise USD 5,463 million or around ETH 15 million via ICOs by September 2018, while USD 5,452 million was sold in the same period. The projects are said to still hold ETH 3.8 million – a quarter of the number of tokens originally raised.

Despite a rocky year for ETH, the data indicates that most of the startups managed to sell at a profit compared to its worth when they acquired it, and have a substantial amount of unrealized gains. The paper reads: ”Of the Ethereum still held by the projects, even at the current USD 230 price, projects are still sitting on unrealized gains, rather than losses.”

The research indicates that the ICOs still have net gains of around USD 93 million regardless of Ethereum’s value being put to the test this year, but this is because most of the funds were gathered prior to 2018: “It may surprise some that ICOs are still in a net unrealized profit situation, but many of the Ethereum balances were built up before the price rally at the end of 2017,”

BitMEX does acknowledge that the totals it published may reflect a lower amount than alternative sources due to its focus specifically on ETH balances and not funds raised in alternative forms.

The data project is also recognized to be slightly contorted by the EOS project, which accounts for 70% of the USD equivalent in ETH that was raised, although BitMEX says that without this data, a similar outcome is still met.

 

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Bank of Russia Reports Successful ICO Experiment

The deputy director of the Bank of Russia (BoR) has said that the central bank’s initial coin offering (ICO) trial experiment was a ”technical” success.

Local news outlet TASS reports that Ivan Semagin relayed the message during the Eastern Economic Forum in Vladivostok, Russia on Monday. Semagin detailed to the forum attendees that BoR held the trial ICO to test the existing infrastructure of the bank’s sandbox.

While he was happy to relay the good results that ”technically everything went well”, he did add that from a legal standpoint, the experiment brought up several issues. The deputy director refrained from sharing any of these legal concerns with the crowd, however, despite the importance of these nuances for startups looking to hold their own coin offerings.

The experiment was a collaborative effort between Russia’s largest state-funded retail bank, Sberbank, and the country’s National Settlement Depository (NSD) on BoR’s regulatory platform that was developed to be used in ICO-style fundraising rounds. The ICO issuer, in this case, was a company called Level One, which manages online lecture tutorials.

BoR’s regulatory platform was itself launched in April this year, with this trial scheduled to test the logistics before it can be rolled out for use by local businesses. Its ambition was declared as helping to rapidly introduce new financial services and technologies that require legal regulations.

It was developed with the input and cooperation of interested state bodies, profile associations and development institutions.

Blockchain voting

Russian officials last month shared that the state has been experimenting with a blockchain-backed electronic voting system, an increasingly popular solution for countries with a poor history of democratic elections.

Unsurprisingly, the notoriously opaque government of Russia have shared no technical details of the proposed system with the public as of yet. The federal coordinator of National Public Monitoring Fedor Kolomoystsev said to reporters: “As part of our congress, we are launching in the test mode an electronic voting system [in elections], which is built on a blocking system.”

 

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10-Year Token Payment Delay Show Rare Developer Commitment

Beijing-based startup Nebulas has made the decision to postpone the initial coin offering (ICO) team’s token payments. They added an additional seven years to prove their determination for the company’s success, in a rare case of altruism for the lambasted industry.

The ICO team were initially planned to be paid through reserves of the startup’s native NAS token over three years following the offering before they agreed this could take place over the forthcoming decade instead.

Nebulas’s marketing director Becky Lu said that the decision was made so that the team could focus their efforts on the ”technical vision” of the company. She said that the decision was not easy as there were still many risks surrounding the blockchain industry and the future value of NAS, saying ”I think that shows our determination”.

Further to this commitment, a blog post from the company on Medium says it will publish the addresses of the undistributed NAS tokens. These make up 55% of the total number of tokens, with 45.5 million currently in circulation.

With the number of ICOs failing to provide the business that they have promised at a shamefully high level, Nebulas’s commitment stands out and sets a high standard for quality.

Its ICO raised USD 60 million in December last year through sales of NAS. The current NAS market cap stands at approximately USD 54.9 million.

The Nebulas project

The Nebulas white paper describes the project as a “value-based blockchain operating system and search engine” with an objective of finding solutions to three key blockchain issues. These include measuring the value of blockchain applications, creating a prosperous and long-term ecosystem, and continuing the development of an existing blockchain.

It harnesses a measurement system titled the Nebulas Rank, developed to find real values using “liquidity, speed, width, and depth of capital”.

 

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Increasing ICO Interest in Thailand as 50 Apply for Licenses

In Thailand, initial coin offerings (ICOs) may soon be finding their legal footing after approximately 50 ICO projects displayed interest in applying for licenses to operate.

Application progress

According to local media outlet The Bangkok Post, the Thai Securities and Exchange Commission (SEC) has seen a growing interest in those wishing to raise funds through the crowdfunding method. Although, according to the SEC secretary-general Rapee Sucharitakul, it remains yet to be seen as to how many of those will be given the operating license.

Furthermore, there are roughly twenty other companies who have made applications for the licenses to operate as cryptocurrency exchanges.

He said, “Licence approvals are being processed,” adding, “Many companies interested in opening digital asset exchanges have said digital assets and cryptocurrency trading in the Thai market are quite active.”

ICO portal

Before the SEC licenses these projects, “ICO portals” will be the first to be selected. The portals are essentially online ICO marketplaces, offering platforms for ICO issuers to operate their sales. According to Sucharitakul, three out of five companies who are seeking to operate as ICO portals have filed their applications already.

In early May, proposals for cryptocurrency tax and regulations were slowly coming to fruition. This came at a time when many international governments and financial regulators were also beginning to formalize appropriate crypto-laws and legislation.

Chief executive Thuntee Sukchotrat of digital asset exchange JIBEX said, “I believe that investors will invest in digital assets instead of stocks in the future. The performance of ICOs will rise in line with ICO project performance. The investment ratio of ICOs to stocks will be on par within two years.”

Recent months

In late May, the Thai SEC established that it would monitor ICO operations and cryptocurrency related businesses. Furthermore, a regulated SEC ICO Portal was further discussed, which would allow for domestic ICOs to be issued legally.

In June, the SEC made further inroads upon the announcement of its cryptocurrency laws, though there are only seven legal cryptocurrencies, which are Bitcoin, Bitcoin Cash, Ethereum, Ethereum Classic, Litecoin, Stellar, and Ripple.

Shortly after, the SEC took five out of 50 ICO projects and announced they would be running them as pilots. Later on in August, Thailand reaffirmed its crypto-positive stance after the Bank of Thailand made it legal for local banks to issue digital tokens, provide crypto brokerage services, operate crypto-related businesses and invest in cryptocurrencies via subsidiaries.

 

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Philippine SEC Shares Draft ICO Regulations

The Philippine Securities and Exchange Commission (SEC) has released a report detailing the country’s proposed initial coin offering (ICO) regulatory guidelines.

The 37-page document released by the SEC reportedly comes after consultancy with several Philippine cryptocurrency companies, including Satoshi Citadel Industries and Coins.ph.

The proposed rules would require Philippines-based startups and corporations to file applications with the SEC detailing the function of the tokens and the business operations of the company. Prior to receiving the go-ahead to hold an ICO, companies would be required to submit an initial assessment request that follows the rules of the Commission within 90 days before the beginning of the token pre-sale.

The white paper, including an operations manual detailing the system’s structure, must also be submitted, alongside the evaluation of an independent legal counsel in evidence that the tokens do not meet the requirements necessary to be registered as securities with the SEC. The proposal goes so far as to request source codes and commands in attempts to expose potential scammers.

Further to receiving approval, advisers and members of the company holding the ICO are required to undergo police clearances to show they are of ”good repute“. The report offers nine instances that a team member could disqualify the ICO, including if they are found to have made any false statements regarding the project during the process, or if they have ever been convicted of offenses including embezzlement, misappropriation, or perjury.

To combat any illicit activities of investors in the ICO, know-your-customer and anti-money laundering policies would be required from all participants.

Similarly to the US, the Philippine SEC highlights the importance of registering tokens as securities should they fall within the legal definition. As stated by US SEC Chairman Jay Clayton, tokens fall under the definition of securities if there is a ”reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others“.

 

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ICOs Only Account for Less Than 2% of Securities Lawsuits

A report released by litigation consultancy firm Cornerstone Research indicates that initial coin offerings (ICOs) account for under 2% of securities class action lawsuits – just 12 of 750 cases.

ICOs are not the main offenders… are they even securities?

With the total number of securities lawsuits at levels unmatched since 1995, the report found cases involving ICOs hit just five in the latter part of 2017, and have reached seven in 2018 so far. There have been 111 suits filed in total since the start of the year. While cases filed against American companies are reported to be on the decline, there is a growing number opened against European and Asian companies, nearly double that seen in the last decade.

Whether ICOs even classify as securities is currently up for debate. Securities can be defined as financial assets that represent a proof of ownership in the stake of a company that has intrinsic monetary value, but some argue tokens and cryptocurrencies purchased during ICOs do not qualify under this definition. This disagreement has led many to question whether the US Securities and Exchange Commission (SEC) is even the correct entity to be investigating cases involving ICOs.

Despite much bad press regarding ICOs, several of these few cases opened against crypto-related companies found fault in their reluctance to file their tokens as securities, which is a legal requirement in the US.

In one instance, Ripple (XRP) is facing three separate lawsuits from investors who lost money when they sold the tokens on. The plaintiff in one of these cases argues the XRP classifies as a security because i) they must be purchased with money, ii) investors reasonably expect to profit from them due to Ripple’s own promotional efforts, and iii) the profits collected are determined by the company’s management decisions.

The Massachusetts branch of the SEC suspended five cryptocurrency companies offering ICOs in March this year because they had all failed to register their tokens as securities.

In February, SEC Chairman Jay Clayton declared that ICOs must meet securities regulations, ”end of story”, although in June the SEC voted that Ethereum did not meet the definition of a security. Ethereum and Ripple have fundamentally different structures and use-cases for them, but it indicates a more reasoned, practical approach may be taken by the SEC in the future.

 

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SEC Chairman Doesn’t Believe Every ICO is a Scam; Japan and South Korea Charge Ahead Toward Regulation

Jay Clayton, the Chairman of the US Securities and Exchange Commission (SEC), gave a speech at a Princeton University event that provided fascinating insight into his evolving views on how to approach initial coin offerings (ICOs) as well as how to classify and regulate cryptocurrencies.

Not every ICO is a scam

Essential discussions that delve deeper into blockchain technologies, ICOs and cryptocurrencies are taking place all over the world. Perhaps now that the markets are cooling off, the topic of how to legitimize the lucrative technology is finally on the table.

During the event, the SEC chairman disregarded that all ICOs were fraudulent scams, bearing contrast to his position in February. At a Senate hearing, Clayton declared he was “unhappy” with how ICOs were conducted, based on the fact that they did not follow private placement rules, and that there were some fraudulent ICO operators.

Clayton made a potent remark that brought to light a solution for a lesser-mentioned problem: what happens if the technology continues to have fraudulent actors? He said:

“I think if we don’t stop the fraudsters, there is a serious risk that the regulatory pendulum – the regulatory actions will be so severe that they will restrict the capacity of this new security.”

Overseas efforts

The United States isn’t the only country wrestling with the ICO debate; in Japan, a recent government-backed study revealed that it now is looking to bring forth the proper legal and regulatory frameworks to give the go-ahead on the popular capital-raising method.

The report included guidelines that will identify investors, which will prevent money laundering, which acts as a protection for existing shareholders and debt holders, making “unfair” trading practices such as insider trading a thing of the past for cryptocurrencies.

The report also goes on to classify three types of ICOs:

The “venture company type” is the typical fundraising method and is defined as “fund-raising by venture companies through high-risk, high return investments”.

The second is the slightly lesser known “ecosystem type” which is described as “fund-raising for collaborative efforts in which multiple corporations such as companies and local governments are engaged”.

The third and probably least known of them all is the “large company type”, which is for “fund-raising by companies for certain in-house projects with high risk”.

Advancements in the United States and Japan are steering the future of cryptocurrency in the right direction; BitcoinNews recently reported that South Korea is making preparations to tax cryptocurrencies, which may come off as alarming, but can be a vital spoke in the regulatory wheel.

Rallying support

What makes it even less alarming is that the third largest fiat-to-Bitcoin market in the world is also preparing to have a cryptocurrency for its capital city, and in fact, the United States and Japan are above South Korea in the fiat-to-Bitcoin market listing.

It is evident that despite the constant negative press, cryptocurrencies are part of very progressive discussions taking place in the largest markets in the world. It is these serious pioneering efforts that will make blockchain technologies and cryptocurrencies validated as part of the economy.

 

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