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Warning: it’s the junk token phase of ICOs

An initial coin offering (ICO) is a fundraising process for blockchain-based projects that allows investors to own part of a project through a digital network token. Startups in the blockchain world often find this method of fundraising more attractive than venture capital funding for the speed and amount they can raise – on 12th June a project called Bancor raised the equivalent of about $150 million within two hours. But leading experts warn: it’s the time of junk tokens of ICOs. So look before you leap.

What is an ICO?

Numerous media and financial experts explain ICO (initial coin offering) as sort of an IPO, or a Kickstarter campaign, that uses blockchain-based “tokens” (app coins, cryptocurrencies, digital assets) allowing startups to raise money. Is it correct or not?

We arranged a small survey among ICO experts and received slightly different explanations: “The term ICO (initial coin offering) has gone from an analogy to an IPO and means the pre-sale of someone’s own tokens by some startup. Such tokens can have different definitions, but more often they are used to pay for user actions on a platform that the startup is promising to build,” explains Pavel Kravchenko, cryptographer and founder of Distributed Lab.

“I would not call it ICO, but rather a token offering. In my view, the acronym is misleading, to assume that it is anything similar to an IPO. Rather than shares, token offerings are ways the user community is able to buy into a utility that is inherently part of the underlying product or network. Rather purchasing tokens means that the users have ways to secure “rebates” on the future service,” Philipp Pieper, co-founder Swarm Fund, argues. Henrik Hjelte, CEO / cofounder at ChromaWay, defines ICO as a sale of tokens, limited in quantity, that gives certain rights in a computer system. “ICO is the process which resembles IPO and Kickstarter at the same time. During this process, a project raises different cryptocurrencies,” says Eugene Lobachev, CEO of Suretly, a company that has created an alternative to investing in p2p-lending and named it “crowdvouching”. Speaking about ICO’s ecosystem, Eugene Lobachev explains, that it seems like chaos right now without any kind of global ICO infrastructure. “There are 3 types of ICO: 1) new blockchains; 2) projects that have found some good use cases; 3) project that have nothing to do with blockchains at all. That’s why the first type of ICO projects is the most important thing for future infrastructure. However, the second one is the most important for the use of technology. The third type allows to attract new type of investors.”

Why ICO is so popular?

Startups have collected tens of millions of dollars by conducting ICOs so far. And there are several reasons. “An ICO is a relatively simple way to invest in a startup; people believe that a startup can become another Bitcoin or Ethereum and want to invest early, and historically, ICO tokens have mainly grown up,” Pavel Kravchenko argues.

“Lots of amateur investors with more cash than they anticipated, want to invest part of their earnings in companies within our ecosystem, acting as very risk-taking investors,” Henrik Hjelte adds. “It is very difficult to raise money from venture capitalists for a project of pre-seed or seed stage. ICO allows a team to raise money on development and marketing,” Eugene Lobachev believes.

Realising what is happening now, some currency watchers warn of too much enthusiasm for blockchain projects that have yet to show practical application. William Mougayar, who organised a Token Summit in New York City in May, has criticised the millions of dollars in fundraising through initial coin offerings last time. “Welcome to the junk tokens phase of ICOs. More dollars raised doesn’t mean you can jump-start an ecosystem of developers or a user community,” he stresses.

There are always risks in any kind of investments, the CEO of Suretly mentions. “Even professional venture investors know that not every project will bring him x10 or x50 because there is a probability that a project will die. So, I would recommend to invest in projects just in case, if you really understand what they are offering and doing. Don’t invest in projects which are not clear for you.”

At the same time Henrik Hjelte, CEO / co-founder at ChromaWay, anticipates that some people that are new investors and blinded by the potential of blockchain might lose a lot of money due to the high risks.” Many experts are equally of the opinion that in its current state the ICO is definitely a bubble.

Molly Spiers, Head of Marketing at CoinCorner, notes, that in respect of the amount being raised, then quite possibly ICOs are a bubble. She explains, that currently without regulation around these ICOs it’s making it very easy for anybody to raise large amounts of money.

“The ICO principle itself will lead to positive changes in venture capital investment, but right now people are buying everything indiscriminately (even a complete scam). Inevitably, people are always looking for faster ways to earn. Those who have earned in Bitcoin, invested in the Ethereum, and who earned on the Ethereum, now invest in ICOs, hoping for the same rapid growth. The pyramid will collapse when: start-ups massively start selling the funds collected in Ether (now they keep them, because rates are only growing); people will understand that startups cannot afford their promises and create products; specific legislation will be developed (now most ICOs are outside of the law),” Pavel Kravchenko, cryptographer and founder of Distributed Lab, believes.

Charles Hoskinson, CEO of IOHK, says: “The ICO phenomenon shows there is irrational exuberance and high liquidity in the market. Just like with the dotcom crash, where investors didn’t understand new technology and there was a lack of due diligence and the market order levitra generic collapsed, a similar thing will happen here. The Securities and Exchange Commission (SEC) will have to make some sort of statement about what ICOs are and whether they are securities. There will be a KYC/anti-money laundering component that has to be part of this. There must be global standards so buyers can have confidence in what they invest in.”

Legal tools to ?ut ICO risks

Global hype around ICOs has stimulated established blockchain companies to provide their clients with international marketing support and legal services through signing the contracts with the Big Four auditors. And it is becoming a trend. As an example, a week ago Deloitte CIS and Waves Platform, a leading developer of blockchain solutions, signed a memorandum on a strategic partnership, which is aimed at providing clients with comprehensive initial coin offering (ICO) services and customised blockchain solutions tailored for specific business tasks.

“Deloitte focuses on application of innovative approaches in its operations and realises how important it is to develop the digital economy. Under this memorandum, Deloitte’s experts, who possess extensive legal and tax expertise in implementing technology projects, will provide the necessary consulting and methodology assistance to businesses and government bodies alike. We will also communicate long-term advantages and opportunities for the companies implementing digital technologies,” Waves Platform officials say.  “In addition to that, one of our objectives is to develop the legal mechanisms for regulating ICO projects. Currently no such mechanisms exist in the market. This will help the companies to safeguard themselves from project risks and challenges after they complete the initial offering of tokens.”

Waves Platform will also assist companies with prioritising during their marketing campaigns to promote new products by selecting channels best suited for a successful project implementation. “The cryptocurrency market is relatively young, and not all the regulatory mechanisms are in place. This is why we are glad to cooperate with Waves Platform and are confident that our joint effort will help create the necessary conditions for putting together the legal framework for blockchain projects both in Russia and the CIS,” says Artem Tolkachev, Director of Legal Services for Technology Projects at Deloitte CIS. “Our partnership is a significant step towards mass application of blockchain technology. Presently, blockchain companies are not regulated, as there is no existing legislation as such. Our strategic partnership with Deloitte will allow us to take active part in the formation of this regulatory landscape. It is important to join this process both for us and the entire blockchain industry in Russia and the CIS,” Waves founder and CEO, Sasha Ivanov, says.

However, the case of Deloitte CIS and Waves Platform is not the only one. Earlier, in April this year, Exscudo – the nextgen financial ecosystem, powered by the EON blockchain – engaged law firm PwC Legal to advise it regarding the compliance procedures for private users as well as for companies and organisations willing to manage fiat currencies.

Since different jurisdictions have different requirements concerning the KYC procedure, Exscudo starts with the Estonian legislation and proceeds to general EU specifications. As a consequence, Exscudo will be able to open merchant bank accounts in the EU jurisdiction, which will enable the company to manage fiat currencies as a financial organisation. “We are excited to welcome the law firm PwC Legal as our legal adviser. Our team is absolutely convinced that the vast crossindustry expertise of PwC will help Exscudo provide high quality financial services for our clients all over the world,” says Andrew Zimine, CEO and Founder of Exscudo.

The Big Four auditor PwC (China) is also supporting Qtum’s efforts to fuel blockchain adoption across the global business world. The Qtum Foundation, developers of the recently revealed Qtum smart contracts blockchain, in March this year announced that PwC is supporting its adoption by the business world. This includes providing comments on a white paper to be prepared by the project team, as well as on their proposed project governance structure.

“PwC sees enormous potential for blockchain to revolutionise business practices as we know them, and the firm has made great efforts in developing strategic and technical capabilities to adapt existing products and services for the new technology. We are excited to get involved in the era of innovation and help companies capture the opportunities and benefits brought by the new technology. Working with the Qtum Foundation aligns with our goal,” said CY Cheung, Fintech and Cybersecurity Partner of PwC China.

ICO: The issue of regulation

All the leading experts tackling the growing trend of ICOs look at the issue of regulation so far. Charles Hoskinson, CEO of IOHK, while speaking at the International blockchain event in Ukraine BIP001, organised by the leading Ukrainian blockchain provider Distributed Lab, emphasised the biggest challenge that he sees the cryptocurrency market is facing. “We are in a bubble and there will be a collapse. A lot of businesses will wash away; the strong will survive. Moving beyond that we either repeat history and create another Federal Reserve, or we can ask ourselves, ‘what can we put into code? That is the ultimate challenge we face as a space. If we are successful, not only do you create something much better, more transparent, and efficient – it will be a global system. That is my hope for what cryptocurrencies can achieve. If we can get there, scams will disappear, and there will be an expectation that things will work the way they ought to, as opposed to today.”

Summing up, regulation will be the key part of blockchain and cryptocurrency markets’ development. If until now it was mostly self-regulated, then further becoming more and more focused on mass-market investors, it would come under stronger and stronger state and market regulation and standardisation.

Kate Goldfinch, editor of The Fintech Times

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