The basic idea
An Initial Coin Offering (ICO) is a new way for organisations to raise capital.
In an ICO, investors receive coins (or tokens) in exchange for a payment, made in a cryptocurrency rather than a fiat currency.
The coins or tokens received represent the investment in the project.
There was a dramatic increase in ICO activity in 2017, fuelled by the ease and simplicity with which businesses can use an ICO to obtain funding for new ideas, and buoyed by a community with the expectation of rapid, large investment returns.
Risks and regulation
Understanding the risks and issues, perceived and evidenced, around ICOs provides context for the increased regulatory involvement.
Investors face risks from fraud – the most consistently identified ICO risk. Publicity about the rapidly increasing values of cryptocurrencies has contributed to the surge in activity, so it’s not surprising that ICOs are a potentially easy way for fraudsters to make money.
Money laundering is again a key risk for economies and regulators, who will also have concerns around unregulated ICOs which have knock-on effects to market stability.
There has been a flurry of activity from regulators in response to the surge in ICO activity.
Regulators have issued consistent warnings of the inherent risks in ICOs and reminders of the need to understand the underlying nature of individual investments.
Regulators have taken the view that this needs to be assessed on a case-by-case basis. Where an ICO is classed as a ‘security’, it would need to satisfy registration and other regulatory requirements, as for any securities offer.