I’m boarding a flight yesterday and murfing (mobile surfing). Flicking between Facebook apps, twitter, bank account, BBC news and more. Suddenly I spot a new ICO – Initial Coin Offering – for a new bank. From Wikipedia: 

 “An initial coin offering (ICO) is a means of crowdfunding the release of a new cryptocurrency. Generally, tokens for the new cryptocurrency are sold to raise money for technical development before the cryptocurrency is released. Unlike an initial public offering (IPO), acquisition of the tokens does not grant ownership in the company developing the new cryptocurrency. And unlike an IPO, there is little or no government regulation of an ICO. 

 “The first ICO was for Mastercoin in 2013. Ethereum raised money with an ICO in 2014. ICOs are now extremely popular. As of May 2017 there were currently around 20 offerings a month, and a new web browser Brave’s ICO generated about $35 million in under 30 seconds. There are at least 18 websites that track ICOs.” 

 So I see this ICO for a new bank … sounds interesting. The new bank will be using all the hottest and latest tech and offers me a guaranteed 50% uplift on my investment at launch. Wow. I want in. 

 I’m busy moving into Kraken to transfer 100 ETH (Ethereum’s cryptocurency) to seal the deal when, just as I’m about to hit the send button, I stop and pause.

This whole thing started as I saw an ad on Facebook for a new bank ICO. I don’t know anything more than that about this bank. My greed had kicked in, thinking that I’d get 150 ETH back by just transferring 100 over to them today. 50 ETH are worth around $16,000 depending on what day of the week we’re making that valuation, so it’s a healthily profit to be made in a couple of weeks. But wait a minute. I don’t anything about these guys. 

Are ICO tokens a scam?

From Terrence Yang, Ex-Wall St. lawyer: "Tim Draper is one of the sharpest VCs in the entire cryptocurrency space. He bought the entire second auction of Bitcoins offered by the US Marshals as part of the Silk Road asset seizure. Tim is participating in the ICO of Tezos. This is merely social proof — do your own diligence.  However, it is a sign that at least one savvy VC does not consider all ICOs a scam."

"Some investors may be more book smart than Tim but what matters in investing is returns and risk.  You can’t just guess right. You have to make bets.  Tim took a lot of risk but because he 'pulled the trigger'.  Since then, Bitcoin prices have skyrocketed. Tim’s mark to market returns are probably fantastic (I don’t know if or when he sold his Bitcoin.)"

With ICOs adding to the confusion of what is already a confusing market of crypto and digital currencies – BTC, ETH, XRP and more – the rule here has to be caveat emptor, buyer beware, and for a more detailed look, here’s a great article from Henry Engler, Thomson Reuters Regulatory Intelligence:

“Initial coin offerings” present dangers to investors, new challenge for U.S. regulators

HOW DO ICO’S WORK?

A simplistic interpretation of the issuance of such coins, or tokens, is that they are an investment on a possible future payoff. For example, if a startup technology firm has a business plan to apply blockchain for a certain solution, say, improve the back-end of securities or payment processing, or enhance record keeping in the insurance sector, investors would purchase the tokens before such a solution is actually realized or operational. The ventures could receive the tokens for payment in future development of their business.

The tokens do not in themselves confer ownership of a stake in the business. Depending on how the deal is structured, the investment in the tokens might lead to a future share in revenues of the venture. In other cases, the investment can be compared to fund-raising or a crowd-funding vehicle, using tokens that could be redeemed for cash at a later date once the venture is successful. Since the issuance of such tokens is currently outside the scope of regulatory oversight, they are seen as a quick way in which tech startups can raise capital without all of the necessary requirements that would come with, say, an initial public offering in stocks.

But what seems to be fueling a lot of the recent flows into such tokens is their speculative potential, and the ability to take the tokens and exchange them for cash on many of the world’s crypto-currency exchanges. If the coin is listed on an exchange after its initial offering, then the likelihood that its value increases grows considerably, say some observers.

However, not all ICOs are created equally. Due to the complexity of the underlying projects, experts argue that investors need to have the technical expertise to be able to evaluate whether investing in an ICO makes sense. Moreover, the startup itself should provide sufficient information for investors to evaluate the investment. In some cases, the information is inadequate.

WHEN IS A TOKEN A SECURITY?

From a regulatory and legal perspective what remains contentious is whether the issuance of such coins are the equivalent to the creation of a new security, and should therefore come under the oversight and regulation of the SEC.

Peter Van Valkenburgh, director of research at crypto-currency advocacy group Coin Center, told a recent New York conference that what participants in the market want to avoid is the creation of a token that acts as a security.

“It’s like painting a target on yourself. Because, what does an organization like the SEC regulate? They regulate IPOs,” Van Valkenburgh told a panel on the legality of ICOs.

Sourse: bravenewcoin.com