ICO’s, Another Bubble Waiting to Burst?

ico initial coin offering

Since Bitcoins are the new stars of the investment arena, many enthusiasts have incentivised small companies and startups to raise money through creating new cryptocurrencies and holding ICO’s (initial coin offerings).

Bitcoin (BTC) prices have risen phenomenally, hovering above $4000. Ethereum (ETH) is still far behind, but there are various reasons why the cryptocurrency market is the strongest it’s ever been.

Litcoin, Iota, and Monero saw the biggest increases in double digits owing to different reasons. All this exuberance, whether irrational or studied, has its impact of increasing the attraction of cryptocurrencies. Adding to this, the high and unaffordable prices of the popular altcoins is increasing the demand for new such altcoins where new money can be pumped in.

What are ICO’s?

ICOs, or Initial Public Coin Offerings, have become a simple and “easy” way to raise money without the hassle for regulatory filings and due diligence.

At this point of time, there are 45 ICOs open as per the ICO calendar. The popularity is definitely on the rise with startups using this route to get around the rigorous capital-raising process and get crowd-funding by luring in the novices looking for a cryptocurrency gain.

Just like in an IPO where initial few shares are sold to the bankers, here too the initial backers are given few tokens (akin to shares). The investors buy these token through fiat or virtual currencies, and if the minimum required amount is not raised, it is returned to the investors and is deemed as an unsuccessful ICO.

Raising an ICO currently just requires creating a white paper on the uses, platform, and features of the new virtual currency but requires no legal sanction, approval, or due diligence.

ICO Success Stories

One of the successful ICOs is Ethereum based on smart contracts platform and finally has Ether coins as the tokens. It was live in 2015 and started with $0.4 per Ether and now stands at $14 per Ether. Seeing these initial successes has made many companies bold enough to come out with offerings with an intention to dupe as well.

A new ICO by the name of Monster Bay Inc. had a pre-sale on July 6, 2017, and was supposed to be sold out in five minutes. It raised $2.5 million with a token price of $0.11. The general sales which opened on July 8, was subscribed up to 82 percent by the closing date of August 8. It finally sold 5.5 million tokens.

This is a company whose revenue model is providing an infrastructure for gamblers using cryptocurrency to wager on sports and bet on games. In the real-world such success would be strewn by questions on the ethics of the business and various rules and regulations on part of the SEC.

Skeletons of the ICO’s

As recently reported, China has banned the complete functioning of ICOs and raising money in the country and asking its regulator to inspect 60 major platforms for ICOs.This sudden scrutiny has come to oversee the country’s risk exposure of the internet in the finance sector. People’s Bank of China, China Securities Regulatory Commission, China Banking Regulatory Commission and China Insurance Regulatory Commission have deemed raising money through ICOs as illegal. This led to the price of Bitcoin fall by 5 percent to $4376 and Ethereum fell by 12 percent as most ICOs were taking place on this platform.

This sudden scrutiny has come to oversee the country’s risk exposure of the internet in the finance sector. People’s Bank of China, China Securities Regulatory Commission, China Banking Regulatory Commission and China Insurance Regulatory Commission have deemed raising money through ICOs as illegal.

This led to the price of Bitcoin fall by 5 percent to $4376 and Ethereum fell by 12 percent as most ICOs were taking place on this platform. ICOs had so far raised $400 million in China alone.

The risks of money laundering are high on using cryptocurrencies, which has been the red flag for most central banks. SEC has raised this recently after focusing on an offering called “The DAO” which came out in 2016 and was using the Ethereum blockchain. Hackers quickly stole the tokens which led to the SEC investigation, and it came out with the declaration that these tokens will be treated as “securities” and are bound to follow the rules.

The SEC, in its press release, stated that the “securities” were subject to federal securities laws. The release confirms the need for the ICO’s to register offers and sales unless a valid exemption is given. Similarly, the exchanges are also required to be registered.

Next Steps

Regulators are now keeping a stern eye on outliers who are misusing this route blatantly and are intentionally duping people. Next steps will be for regulators to form concrete and uniform laws around crypto-currencies in consultation with the industry big-wigs. Regulators like SEC and the rest are collecting behaviour patterns on the basis of which the nature of this “security” will be studies and investor interest will be determined. Transparency and trust will be the foremost issues to be addressed.

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