An initial coin offering (ICO) or initial currency offering is a type of funding using
cryptocurrencies
A cryptocurrency, crypto-currency, or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank
A bank is a financial i ...
. It is often a form of
crowdfunding
Crowdfunding is the practice of funding a project or venture by raising money from a large number of people, typically via the internet. Crowdfunding is a form of crowdsourcing and alternative finance. In 2015, over was raised worldwide by crow ...
, although a private ICO which does not seek public investment is also possible. In an ICO, a quantity of cryptocurrency is sold in the form of "tokens" ("coins") to
speculators or
investor
An investor is a person who allocates financial capital with the expectation of a future Return on capital, return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some specie ...
s, in exchange for
legal tender
Legal tender is a form of money that courts of law are required to recognize as satisfactory payment for any monetary debt. Each jurisdiction determines what is legal tender, but essentially it is anything which when offered ("tendered") in pa ...
or other (generally established and more stable) cryptocurrencies such as
Bitcoin
Bitcoin ( abbreviation: BTC; sign: ₿) is a decentralized digital currency that can be transferred on the peer-to-peer bitcoin network. Bitcoin transactions are verified by network nodes through cryptography and recorded in a public distr ...
or
Ether
In organic chemistry, ethers are a class of compounds that contain an ether group—an oxygen atom connected to two alkyl or aryl groups. They have the general formula , where R and R′ represent the alkyl or aryl groups. Ethers can again be c ...
. The tokens are promoted as future functional units of currency if or when the ICO's funding goal is met and the project successfully launches.
An ICO can be a source of
capital
Capital may refer to:
Common uses
* Capital city, a municipality of primary status
** List of national capital cities
* Capital letter, an upper-case letter Economics and social sciences
* Capital (economics), the durable produced goods used f ...
for
startup companies
A startup or start-up is a company or project undertaken by an entrepreneur to seek, develop, and validate a scalable business model. While entrepreneurship refers to all new businesses, including self-employment and businesses that never intend t ...
. ICOs can allow startups to avoid regulations that prevent them from seeking investment directly from the public, and intermediaries such as venture capitalists, banks, and stock exchanges, which may demand greater scrutiny and some percentage of future profits or joint ownership. ICOs may fall outside existing regulations,
depending on the nature of the project, or be banned altogether in some jurisdictions, such as
China
China, officially the People's Republic of China (PRC), is a country in East Asia. It is the world's most populous country, with a population exceeding 1.4 billion, slightly ahead of India. China spans the equivalent of five time zones and ...
and
South Korea
South Korea, officially the Republic of Korea (ROK), is a country in East Asia, constituting the southern part of the Korea, Korean Peninsula and sharing a Korean Demilitarized Zone, land border with North Korea. Its western border is formed ...
.
Due to the lack of regulation and enforcement of securities law, ICOs have been the vehicle for scams and fraud.
Fewer than half of all ICOs survive four months after the offering,
while almost half of ICOs sold in 2017 failed by February 2018.
Despite their record of failure and the falling prices of cryptocurrencies, a record $7 billion was raised via ICO from January–June 2018.
History
The first token sale (also known as an ICO) was held by Mastercoin in July 2013.
Ethereum
Ethereum is a decentralized, open-source blockchain with smart contract functionality. Ether (Abbreviation: ETH; sign: Ξ) is the native cryptocurrency of the platform. Among cryptocurrencies, ether is second only to bitcoin in market capita ...
raised money with a token sale in 2014, raising around 31,000 BTC in July, equal to approximately $18.3 million at the time.
ICOs and token sales became popular in 2017. There were at least 18 websites tracking ICOs before mid-year. In May, the ICO for a new web browser called
Brave generated about $35 million in under 30 seconds. Messaging app developer
Kik's September 2017 ICO raised nearly $100 million. At the start of October 2017, ICO coin sales worth $2.3 billion had been conducted during the year, more than ten times as much as in all of 2016. As of November 2017, there were around 50 offerings a month, with the highest-grossing ICO as of January 2018, being Filecoin raising $257 million (and $200 million of that within the first hour of their token sale).
By the end of 2017, ICOs had raised almost 40 times as much capital as they had raised in 2016, although still amounting to less than two percent of the capital raised by
IPOs
In demonology, Ipos is an Earl and powerful Prince of Hell (a Duke to some authors) who has thirty-six legions of demons under his command. He knows and can reveal all things, past, present and future (only the future to some authors, and past ...
.
ICOs are sometimes called "token sales". Amy Wan, a
crowdfunding
Crowdfunding is the practice of funding a project or venture by raising money from a large number of people, typically via the internet. Crowdfunding is a form of crowdsourcing and alternative finance. In 2015, over was raised worldwide by crow ...
and syndication lawyer, described the coin in an ICO as "a symbol of ownership interest in an enterprise—a digital stock certificate" stating that they are likely subject to regulation as securities in the U.S. under the
Howey test
''Securities and Exchange Commission v. W. J. Howey Co.'', 328 U.S. 293 (1946), was a case in which the Supreme Court of the United States held that the offer of a land sales and service contract was an "investment contract" within the meaning of ...
.
Ethereum is (as of February 2018) the leading
blockchain
A blockchain is a type of distributed ledger technology (DLT) that consists of growing lists of records, called ''blocks'', that are securely linked together using cryptography. Each block contains a cryptographic hash of the previous block, a ...
platform for ICOs with more than 80% market share. Tokens are generally based on the Ethereum
ERC-20
Ethereum is a decentralized, open-source blockchain with smart contract functionality. Ether (Abbreviation: ETH; sign: Ξ) is the native cryptocurrency of the platform. Among cryptocurrencies, ether is second only to bitcoin in market capita ...
standard.
On January 30, 2018,
Facebook
Facebook is an online social media and social networking service owned by American company Meta Platforms. Founded in 2004 by Mark Zuckerberg with fellow Harvard College students and roommates Eduardo Saverin, Andrew McCollum, Dustin M ...
banned advertisements for ICOs as well as for
cryptocurrencies
A cryptocurrency, crypto-currency, or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank
A bank is a financial i ...
and
binary options
A binary option is a financial exotic option in which the payoff is either some fixed monetary amount or nothing at all.Breeden, D. T., & Litzenberger, R. H. (1978). "Prices of state-contingent claims implicit in option prices". ''Journal of Busin ...
.
By April 2018, ICO advertising has been banned not only by Facebook, but by
Twitter
Twitter is an online social media and social networking service owned and operated by American company Twitter, Inc., on which users post and interact with 280-character-long messages known as "tweets". Registered users can post, like, and ...
,
Google
Google LLC () is an American multinational technology company focusing on search engine technology, online advertising, cloud computing, computer software, quantum computing, e-commerce, artificial intelligence, and consumer electronics. ...
, and
MailChimp
Mailchimp is a marketing automation platform and email marketing service. "Mailchimp" is the trade name of its operator, Rocket Science Group, an American company founded in 2001 by Ben Chestnut and Mark Armstrong, with Dan Kurzius joining at a l ...
. Facebook changed their mind and June 26, 2018 announced to reopen for approved advertisers.
Efforts are under way to deploy ICO technology to represent regulated securities, referred to as
Security Token Offerings (STOs), Digital Security Offerings (DSOs), and when listed on a regulated stock exchange, tokenized IPOs.
An initial stake-pool offering (ISPO), also known as an ISO, is a novel variation of an ICO for funding
cryptocurrency
A cryptocurrency, crypto-currency, or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it. It i ...
projects. In an ISPO, users stake their cryptocurrency holdings (mostly notably
ADA
Ada may refer to:
Places
Africa
* Ada Foah, a town in Ghana
* Ada (Ghana parliament constituency)
* Ada, Osun, a town in Nigeria
Asia
* Ada, Urmia, a village in West Azerbaijan Province, Iran
* Ada, Karaman, a village in Karaman Province, Tur ...
) through a stake-pool operated by the cryptocurrency project.
The first formal ISPO, and so far most successful, was launched on July, 1st, 2021. By October 2021 more than 35,000 participants across the world contributed more than 600 million ADA (worth more than $1 billion USD in October 2021). Participants received 0.065 $MELD / $ADA staked / epoch while keeping full ownership of their ADA.
Criticisms
As a mechanism for scams
Although ICOs can be used for fraud, they are also used for legal activities such as corporate finance and charitable fundraising. The
Securities and Exchange Commission
The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market ...
(SEC) has warned investors to beware of scammers using ICOs to execute "
pump and dump
Pump and dump (P&D) is a form of securities fraud that involves artificially inflating the price of an owned stock through false and misleading positive statements, in order to sell the cheaply purchased stock at a higher price. Once the operat ...
" schemes, in which the scammer talks up the value of an ICO in order to generate interest and drive up the value of the coins, and then quickly "dumps" the coins for a profit.
Snapchat
Snapchat is an American multimedia instant messaging app and service developed by Snap Inc., originally Snapchat Inc. One of the principal features of Snapchat is that pictures and messages are usually only available for a short time before the ...
,
LinkedIn
LinkedIn () is an American business and employment-oriented online service that operates via websites and mobile apps. Launched on May 5, 2003, the platform is primarily used for professional networking and career development, and allows job se ...
and
MailChimp
Mailchimp is a marketing automation platform and email marketing service. "Mailchimp" is the trade name of its operator, Rocket Science Group, an American company founded in 2001 by Ben Chestnut and Mark Armstrong, with Dan Kurzius joining at a l ...
all have limited companies from marketing ICOs via their platforms.
Jimmy Wales
Jimmy Donal Wales (born August 7, 1966), also known on Wikipedia by the pseudonym Jimbo, is an American-British Internet entrepreneur, webmaster, and former financial trader. He is a co-founder of the online non-profit encyclopedia Wikipedi ...
, founder of Wikipedia, stated in 2017 that "there are a lot of these initial coin offerings which in my opinion are absolute scams and people should be very wary of things that are going on in that area."
Chinese internet platforms
Baidu
Baidu, Inc. ( ; , meaning "hundred times") is a Chinese multinational technology company specializing in Internet-related services and products and artificial intelligence (AI), headquartered in Beijing's Haidian District. It is one of the la ...
,
Tencent
Tencent Holdings Ltd. () is a Chinese multinational technology and entertainment conglomerate and holding company headquartered in Shenzhen. It is one of the highest grossing multimedia companies in the world based on revenue. It is also the w ...
, and
Weibo Weibo may refer to:
* Microblogging in China, or China-based microblogging services (), including:
** NetEase Weibo (), launched by NetEase
** People's Weibo (), launched by ''People's Daily''
** Phoenix Weibo (), launched by Phoenix Television
** W ...
have also prohibited ICO advertisements. The Japanese platform
Line
Line most often refers to:
* Line (geometry), object with zero thickness and curvature that stretches to infinity
* Telephone line, a single-user circuit on a telephone communication system
Line, lines, The Line, or LINE may also refer to:
Arts ...
and the Russian platform
Yandex
Yandex LLC (russian: link=no, Яндекс, p=ˈjandəks) is a Russian multinational technology company providing Internet-related products and services, including an Internet search engine, information services, e-commerce, transportation, maps ...
have similar prohibitions.
The UK
Financial Conduct Authority
The Financial Conduct Authority (FCA) is a financial regulation, financial regulatory body in the United Kingdom, but operates independently of the UK Government, and is financed by charging fees to members of the financial services industry. The ...
has warned that ICOs are very high risk and speculative investments, are scams in some cases, and often offer no protections for investors. Even in cases of legitimate ICOs, funded projects are typically in an early and therefore high-risk stage of development. The
European Securities and Markets Authority
The European Securities and Markets Authority (ESMA) is an independent European Union Authority located in Paris.
ESMA replaced the Committee of European Securities Regulators (CESR) on 1 January 2011. It is one of the three new European Supe ...
(ESMA) notes high risks associated with ICOs and the risk that investors may lose all of their cash.
As a bubble
A 2017 ''
Wired
''Wired'' (stylized as ''WIRED'') is a monthly American magazine, published in print and online editions, that focuses on how emerging technologies affect culture, the economy, and politics. Owned by Condé Nast, it is headquartered in San Fra ...
'' article predicted in 2017 that the bubble was about to burst. In 2017, some investors flooded into ICOs in hopes of participating in the financial gains of similar size to those enjoyed by early Bitcoin or Ethereum speculators.
Regulation
Following a speculative boom in cryptocurrency prices that peaked in December 2017, regulation of cryptocurrencies has been rapidly changing. The pace of change has been driven in part by incidents of cybertheft, trading halts, and possible
market manipulation
In economics and finance, market manipulation is a type of market abuse where there is a deliberate attempt to interfere with the free and fair operation of the market; the most blatant of cases involve creating false or misleading appearances ...
.
Cryptocurrencies are based on
distributed ledger
A distributed ledger (also called a shared ledger or distributed ledger technology or DLT) is the consensus of replicated, shared, and synchronized digital data that is geographically spread (distributed) across many sites, countries, or institutio ...
technologies which enable anyone to purchase or transfer their cryptocurrency holdings to any other person without the need for an intermediary (such as an exchange) or to update a central record of ownership. Cryptocurrencies can be transferred easily across national and jurisdictional boundaries. This makes it difficult for central authorities to control and monitor the ownership and movement of holdings of cryptocurrencies.
Countries have different approaches to how they regulate cryptocurrencies. This can depend on the nature of the cryptocurrency itself.
There are two main types of cryptocurrencies from a regulatory perspective: utility tokens and asset-backed tokens. Utility tokens may have value because they enable the holder to exchange the token for a good or service in the future, such as
Bitcoin
Bitcoin ( abbreviation: BTC; sign: ₿) is a decentralized digital currency that can be transferred on the peer-to-peer bitcoin network. Bitcoin transactions are verified by network nodes through cryptography and recorded in a public distr ...
. Asset-backed tokens may have value because there is an underlying asset which the holder of the token can attribute value to. In many countries it is uncertain whether utility tokens require regulation, while it is more likely that asset-backed tokens do require regulation.
This makes it complex for the issuers of cryptocurrencies to analyze which countries their tokens (or coins) can be sold into, and for the prospective purchasers of cryptocurrencies to understand which regulations, if any, should apply.
The
Gibraltar
)
, anthem = " God Save the King"
, song = " Gibraltar Anthem"
, image_map = Gibraltar location in Europe.svg
, map_alt = Location of Gibraltar in Europe
, map_caption = United Kingdom shown in pale green
, mapsize =
, image_map2 = Gib ...
British Overseas Territory
The British Overseas Territories (BOTs), also known as the United Kingdom Overseas Territories (UKOTs), are fourteen dependent territory, territories with a constitutional and historical link with the United Kingdom. They are the last remna ...
Financial Services Commission announced in early February 2018 that regulations are being developed to qualify "authorized sponsors" of ICOs, who are supposed to be "responsible for assuring compliance with disclosure" and compliance with "financial crimes rules".
See also
*
Alternative currency
A complementary currency is a currency or medium of exchange that is not necessarily a national currency, but that is thought of as supplementing or complementing national currencies. Complementary currencies are usually not legal tender and thei ...
*
Airdrop
An airdrop is a type of airlift in which items including weapons, equipment, humanitarian aid or leaflets are delivered by military or civilian aircraft without their landing. Developed during World War II to resupply otherwise inaccessible tro ...
*
Digital asset
A digital asset is anything that exists only in digital form and comes with a distinct usage right. Data that do not possess that right are not considered assets.
''Digital assets'' include but are not exclusive to: digital documents, audible ...
*
Private currency
A private currency is a currency issued by a private entity, be it an individual, a commercial business, a nonprofit or decentralized common enterprise. It is often contrasted with fiat currency issued by governments or central banks. In many count ...
References
{{Cryptocurrencies, state=expanded
Cryptocurrencies