At the moment, the capitalization of companies which raised their capital with the Initial Coin Offering (ICO) is extremely high. Their capital is estimated to an $8,185,983,781. It is expected that in the following months it will only get higher due to a growing number of new ICOs. There are already more than 60 ICOs listed for September and it is expected that the number will only increase. However, the number of ICOs in the following months is not the main point of this article. What the ICOs that have already been finished as well as the ones that are still coming are not realizing is the problem of incorporation.
Why is this so important? Well, if an ICO wants to operate as a standard company in a particular country (have a bank account, etc.), then it has to incorporate in accordance to the law of the country it wants to operate in. Meaning, it has to be in accordance to AML and KZY.
Let us first look at the definitions. According to the definition from Investopedia:
Anti-money laundering (AML) refers to a set of procedures, laws or regulations designed to stop the practice of generating income through illegal actions.
Know Your Client (KYC) form is a standard form in the investment industry that ensures investment advisors to know detailed information about their clients' risk tolerance, investment knowledge and financial position.
In most cases, money launderers hide their actions through a series of steps that make it look as if money that came from illegal or unethical sources had been earned legitimately.
Though AML laws cover only a relatively limited number of transactions and criminal behaviors, their implications are extremely far-reaching. For example, AML regulations require institutions issuing credit or allowing customers to open accounts to complete due-diligence procedures to ensure that these institutions are not aiding in money-laundering activities. The onus to perform these procedures is on the institutions and not on the criminals or the government.
KYC forms protect both the clients and the investment advisors. Clients are protected by having their investment advisor know what investments best suit their personal situations. On the other hand, investment advisors are protected by knowing what they can and cannot include in their client's portfolio.
It is clear that without doing AML and KYC, ICOs will not be able to incorporate in regulated environment that offers security to the investor. This will effect ICOs in two ways. Firstly, those who did not take in consideration this aspect are subject to high-risk penalties, and criminal prosecution. Secondly, ICOs will lose a lot of time and money eliminating irregularities, if this is even possible, so the returns will not be as high. Due to the pressure, the ICO team could even eliminate them. Without conforming to these regulations, companies will not be able to grow and employ, because they will not be able to finance operational costs.
One of the first to realize this was Bancor, who is now trying to do KYC post festum.
To sum up, ICO is categorized as raising funds and it should be done in accordance to existing legal frameworks. ICOs who did not respect this will have several problems with incorporation and will have additional costs doing so. This will decrease the price of their token. We estimate that some projects will even fail to incorporate so they will not provide any return to their investors due to their inability to operate. Consequently, the market adjustment will have to come sooner than later and we are on the short side of the market for projects that did not raise capital by the book.