Blockchain companies continue to push the envelope. Their latest innovation: <b>redefining the approach to financing. </b>
Icos (initial coin offerings) were once limited to a small number of fanatical tech proponents. Now they are quickly becoming a gold magnet for cutting-edge venture capital. The Hong Kong Open ANX Foundation is a blockchain company that has just launched an ICO with a financing target of $22.5 million in digital currency. Other companies will certainly follow suit.
If you are interested in this new way of investing, please learn about ICO below first.
What is an ICO?
An ICO is a combination of crowdfunding and financing, a way for blockchain developers to finance new projects.
Current financing is usually done by issuing new tokens and exchanging them for existing digital currencies, such as Bitcoin or Ether, a process known as the pre-stage. Once the token is issued and run, it can be used to access related development projects.
In addition, if the project is successful, early investors will profit from the increase in the capital value of this digital token.
The process of an ICO
The technical process of ICO seems simple. After obtaining the funds, new digital tokens are issued to the supporters according to the smart contract, which can be exchanged for a predetermined financing amount. Capital is usually raised by depositing digital currency into startup developers.
The ICO document includes a white paper listing general information about the blockchain project and the digital tokens that will be issued. Sometimes accompanied by a technical white paper detailing the technical information of the project and the ICO. An ICO with a better architecture may have a Offering Memorandum that describes various risk factors and investment processes.
Who participates in the ICO
Major Asian investors of interest include:
Pantera Capital, the first U.S. bitcoin investment firm to invest only in blockchain technology, Pantera invested in ZCash, Ripple Labs and Coins.Ph.
Blockchain Capital, founded in 2013, was the first venture capital to accept a Bitcoin funding request. And keep an eye on the Bitcoin and blockchain ecosystems. Notable investment cases include Coinbase and Wave.
3. Digital Currency Group, a well-known investment firm that supports Blockchain companies in Asia, such as Melotic, Luno and BTCC.
4. Distributed Capital, the first Asian venture capital firm focused on blockchain companies, has invested in Abra and Synbotiont.
Why VCs are interested in ICOs
Some venture capital firms believe that value is concentrated at the shared protocol layer of blockchain projects, rather than the application layer.
Digital tokens mean that the creators of blockchain protocols can profit directly from the protocol. The common practice is to keep a portion of the digital token for developers, early investors, or early adopters. Once the protocol project is launched and successful, early proponents can form an active investment feedback loop that allows the market to support digital tokens. Based on the success of blockchain protocols, applications can attract interest from underlying blockchain protocols that already have market share. The token price rises, and the market share of the protocol will rise faster than any application.
One of the main attractions of ICOs is that digital tokens issued by developers are tradable. It is possible to exchange other digital currencies and exchange fiat currencies through digital exchanges, bringing market liquidity.
Are ICOs regulated?
Not yet, but there's another question to consider: Should ICOs be regulated?
Many of the characteristics of ICOs are similar to securities, and ICO documents are roughly based on documents similar to the issuance of securities. Even "initial coin offering" (ICO) is similar to "initial public offering" (IPO).
People who believe that ICOs are not securities emphasize the following factors:
1. ICOs do not provide shares in blockchain companies.
2, ICOs only offer cryptocurrency discounts, cryptocurrencies are not securities.
3. ICOs are global instruments, not national investment instruments, and are not controlled by any central authority or bank.
4. The digital token issued by the ICO is an application token that can be applied to the blockchain protocol being developed.
At the same time, people who believe that ICOs are securities mention that ICOs can meet the traditional standards of the securities industry. ICO token buyers are expected to make a profit. Once a product appears that can be invested or speculated on (rather than applied), it is likely to be considered a security. Once publicly sold, it will arouse greater regulatory interest.
The situation in Hong Kong is unclear. The Definition of Securities by the Securities and Futures Ordinance does not immediately recognize ICOs as securities. However, the Securities and Futures Commission can determine by way of notification that a class of interest, rights or property is securities. Similarly, the securities issuance mechanism extends to regulated investment agreements that provide a return on investment in reference to any change in the value of an asset. It can be considered that this broad concept encompasses digital tokens issued by ICOs.
risk
ICOs are usually initiated early in development, sometimes in the concept stage. Investments in any early-stage business are inherently risky.
Blockchain is a nascent technology. There is a lack of smart investment in the blockchain space. Not suitable for investors who are accustomed to monitoring public information and managing investments in a regulatory environment.
Kytec and AML standard compliance for many ICO projects is not strict.
The ICO infrastructure does not provide regulators with the use of funds, or the reliability of the underlying blockchain project development. There is nothing to prevent developers from absconding with ICO proceeds.
But ICOs are highly profitable. In the future they will attract unreliable people who want to raise money in a non-regulatory environment, as well as more public investors who do not understand the risks of investment. This can be risky. Future prospects
The ICO will continue. Many commentators believe that the value of ICOs lies in the usefulness of the tokens issued. Related to the protocol theory that underpins blockchain technology. ICOs combine cost-effective financing with building a positive network of supporters. Solves the pain points of large-scale financing by private companies around the world, even before the formation of market liquidity.
Regulators will continue to keep a close eye on ICOs. Regions such as Hong Kong have added blockchain technology to the regulatory sandbox in order to understand how the technology works and what the risks are. Regulators' silence or inaction should not be seen as recognition. Poor projects for a large number of retail investors can easily lead to direct regulatory intervention.
At the same time, the person or institution that organizes the ICO needs to formulate preventive measures in the ICO process so that the regulator can eliminate his responsibilities in the case of strict control of the ICO. These include:
1. Delay token distribution until the underlying network has started to run.
2. Only use tokens with use value, and avoid only speculative tokens.
3. Build open source software and adopt an open and transparent blockchain.
4. Operate according to the process of regulated investment, including risk disclosure, investor assessment, AML and KYC processes, and investor reporting.
5. Reserve a portion of the digital tokens in case of any licensing responsibilities or regulatory costs and penalties.
6. Consider locking in tokens so that developers cannot trade their own digital tokens until the development goals are completed.
ICOs are the Wild West of the financial industry. But the boundaries of the past have been tamed and civilized. Careful and proper development of ICO financing is likely to result in less friction and increase the participation and liquidity of blockchain protocol companies. This could be a wonderful new world.