What Are the IGF’s Best Practices for ICOs?
The rapid rise of Initial Coin Offerings (ICOs) has provided an exciting new opportunity for budding fintech ventures. To date, companies offering new cryptocurrencies and further innovations in blockchain technology have raised well over $2 billion, with a large portion of these investments occurring during the first six months of 2017. However, while the ICO market offers a uniquely accessible economic opportunity for startups and investors alike, a number of challenges threaten to destabilize the sector before it can reach its full potential. A lack of effective best practices has left ICOs vulnerable to fraudulent and criminal activity, and at the same time authorities have linked a few key ICOs to criminal financing efforts. This harsh reality threatens to damage public confidence in ICOs, which could prompt national regulators to take a stricter approach to reining in the sector.
Spearheaded by accomplished business leaders with expertise in areas that include blockchain, financial regulations, global capital markets, business ethics, and token economics, the ICO Governance Foundation (IGF) has set out to improve the stability of the ICO sector by recruiting participants in the creation of a transparent, decentralized system of self-governance. The nonprofit does not concern itself with rating ICOs or providing investment advice. Instead, the IGF seeks to provide stakeholders with the necessary resources to assess ICOs for themselves.
The IGF’s self-regulatory system invites ICOs to adopt a set of best practices, comprised in a protocol known as the IGF-1. This custodial agreement provides information to help investors understand the goals and functions of the ICO and allows the ICO community to hold startups to their own promised ethical and operational standards.
First and foremost, the IGF-1 protocol clearly details the entity — whether it be one company or a group of companies — that is receiving funds in the ICO. In addition, it outlines the governance structure of the ICO beneficiary, introducing investors to the leadership team involved in the funding effort and providing background check declarations for all members. IGF best practices recommend that ICO organizations describe any existing business endeavors undertaken by their members, as well as the legal jurisdictions governing their activities, and recommend that ICO leaders possess experience in a particular organization’s area of operation.
ICOs filing an IGF-1 also should provide a schedule of events associated with the Initial Coin Offering, including the intended fundraising milestones and token vesting dates. ICOs also must explain why they are seeking capital and elaborate upon their organizational mission, as well as describe how they plan to conduct their fundraising efforts. ICO organizers must detail their vesting structures and agreement processes such as smart contracts, as well as any promotional activities undertaken to promote the ICO. The IGF advises ICOs to follow the best practice of avoiding extensive marketing expenditures in order to preserve a stable and disciplined investment environment. In addition to funds allocated for marketing, IGF-1 filers should also disclose the percentage of tokens allocated for advisors, foundations, ICO employees, and the organizational entity itself. The IGF-1 also ensures transparency in regards to token prices preceding a public sale in adherence with the IGF best practice advising against the use of excessive presale discounts.
A lack of standardized security protocols is one major detriment of the ICO sector’s deregulated nature. As such, IGF best practices prompt ICOs to enumerate the security protocols they’ve implemented in order to protect their token sales, including measures used to protect against social engineering, domain spoofing, man-in-the-middle attacks, and other cybersecurity threats.
Several best practices outlined in the IGF-1 revolve around the role that nonprofit foundations should play in the ICO process. IGF-1 standards task nonprofits with the transfer and management of private token keys, the handling of ICO proceeds, and the ownership of intellectual property associated with the ICO’s project. By partnering with nonprofits in these areas, ICO organizers add an additional layer of trust to their financial processes, boosting the transparency provided by the public IGF-1 registry.