Tokenization: The world of ICOs by Arjun Kharpal

TL;DR - Definition, explanation, and examples of an Initial Coin Offering (ICO)

Helpfulness - 5

Tags - initial coin offering, ICO, initial capital, financing, creative funding strategies, ICO scams, ICO regulations, blockchain

Questions answered:

  • What is an ICO?
  • How does an ICO work?
  • How are entrepreneurs trying to ‘tokenize’ business?
  • What are some examples of successful ICOs?
  • What are some examples of bad/fraudulent ICOs?
  • How are ICOs regulated?

Summary:

  • Many blockchain technology startups are now turning to cryptocurrencies instead of public stock markets or venture capital to raise funds.
  • There are over 1,000 digital tokens in existence.
  • An Initial Coin Offering (ICO) is a new fundraising tool for startups.
    • A startup can create a new cryptocurrency or digital token via different platforms such as Ethereum which has a toolkit allowing companies to create digital coins.
    • When the company launches a public ICO, investors can buy its digital tokens with other cryptocurrencies such as bitcoin.
    • However, investors do not get any equity stake in the company; instead the digital tokens can be used on the company’s product/service that is to be created and investors can trade the tokens for profits if their value increases.
  • Examples of successful ICOs include: Filecoin ($257 million), Tezos ($232 million), EOS ($180 million), SIRIN LABS Token ($157.9 million), and Bancor ($153 million - in about three hours).
  • Different countries regulate ICOs in different ways.
    • Illegal in China and South Korea
    • No specific regulations in the US, but the Securities and exchange Commission (SEC) can intervene; if the SEC deems that a coin is a “security”, then its company may have to register with the SEC.
    • Many countries are currently looking into how to regulate ICOs.
  • Investing in ICOs is risky because it is putting money into products that do not exist yet.
    • These projects have high failure rates; hundreds of coins are already dead; many of them were scams or did not materialise.
  • Due to the lack of regulations, scams are rife in the industry and there is very little consumer protection.
    • A project called Giza claimed to be developing a super-secure device that would allow people to store cryptocurrencies.
    • Scammers managed to raise over $2 million from over 1,000 investors and eventually run off with the funds without delivering any product
  • Even successful ICOs sometimes face problems; Bancor suffered a security breach that saw $13.5 million worth of digital tokens stolen.
  • There are a lot of problems but also a lot of promise in the ICO space; if ICOs survive, they could pose a challenge to traditional funding methods such as IPOs, VC, or corporate debt.
  • The idea of “tokenizing” a product via an ICO could lend itself to traditional assets like stocks, bonds, or even currencies like the U.S. dollar.

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