Few parts of the cryptocurrency movement are more controversial than the existence of ICOs. An ICO (Intial Coin Offering) is a fundraising method that was both pioneered and made accessible by the Ethereum platform. It is the process by which an aspiring cryptocurrency team sells tokens which are presumed to have future utility or value in regards to a specific cryptocurrency platform or application. It allows investors all over the world to contribute to the fundraising event and has created a wide variety of challenging problems for investors, companies, and regulators.
The controversy over ICOs is multifaceted. ICOs have empowered scammers to separate investors from their money with greater ease, they have presented regulators with a situation which may represent an unregistered securities offering, and some cryptocurrency advocates claim that ICOs have created a huge number of projects and assets which present nonviable use cases if not outright scams.
However, Initial Coin Offerings also represent a fundamental innovation. ICOs make investment opportunities available in an egalitarian fashion to a global audience instead of limiting start-up capital to a limited number of geographically positioned accredited investors. Additionally, its allows the investment assets to be traded as soon as the sale is completed instead of requiring investors to wait until a public listing. This easy access liquidity alongside the democratization of access to early stage fundraising had the possibility to create an entirely new way that early capitalization of projects occurs.
So which is it? Are ICOs a scourge that should be eliminated from our financial system as soon as possible to protect investors or are they a revolutionary way to redefine capital markets? The truth likely is somewhere between those two extremes.
After observing a year of ICOs, one clear standout is that the highly unregulated environment has ensured that the majority of projects have been failures or outright scams. This is partially due to the inability for any investors to adequately value cryptoasset projects due to the nature of the sector, but is also a result of the lack of regulation.
It is clear that if ICOs are to have a future additional regulation must be implemented. This will be a challenging task as one of the key elements of an ICO is that it is a global event that spans the jurisdiction of every nation. It will be important for each nation to not create regulations which hamper the process in so far as ICOs become a part of the financial system, and yet at the same time certain investor protections must be created.
However, do ICOs have any place as a part of the global financial system? I believe they do.There are still a range of solutions that must be put in place before ICOs are a truly legitimate part of capital markets (token custody, securities determinations for token types, registered exchanges, retrieval solutions for lost tokens, technical simplification, etc) but I believe ICOs are here to stay. The fundamental democratization of access to investing offered by ICOs is an improvement over our existing systems, despite loud warnings that your average investor is not knowledgeable enough to participate in early stage capital funding. An ICO leaves early companies without the guidance of an VC fund, however this is easily remedied by new models of tokenization that allows VC funding and an ICO to coexist.
ICOs offer a way for early investors to trade their shares or assets almost immediately, instead of waiting years to be able to sell private equity in a company. This offers wide reaching benefits across the entire ecosystem. It lets investors access their capital and returns in less time, which allows that capital to be reinvested into other projects. It offers early employees a way to realize stock options without waiting for a far off public listing and allows the public to choose to invest in the project instead of being barred from participating for the early years with the most growth chance.
There are many issues that exist with the utility token model (velocity, poor use cases, frictional user experience) and we will most likely see the type of token being offered by an ICO go through a total overhaul. Regulations will come and tame the landscape, protecting the average investor. The ICOs of the future will likely not resemble what we are encountering today, however much as a catepillar is no longer a butterfly we are still able to see the likeness of the catepillar in the butterfly.
The core innovations of ICOs are the ways it has made investing and fundraising easier than ever before. Humans do not turn their backs on ways to make their processes easier and quicker. I believe ICOs will be here to stay, albeit in a different form.