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How can regulation help invest in ICOs ?

After the many scandals around ICO, how can we take advantage of this great investment opportunity, without taking a huge risk ? Some regulated option are now available.

Habibata TOURE
Jan 16 · 5 min read

Blockchain has been called the most disruptive technology of the last ten years. Everything started in 2009 with the creation of Bitcoin, the first decentralized cryptocurrency. Over the years, more cryptocurrencies have been created resulting in a total of 1,335 different digital currencies with a market capitalization of $200 billion (CoinMarketCap.com) in December 2019 and more than $800 billion in December 2017 with the historical price run.
This growing interest in cryptocurrencies has led to the creation of ICOs, a new type of crowdfunding based on blockchain, with which more than $3.5 billion [1] has been raised. But what is exactly an ICO and what is the difference with classic crowdfunding?

What is an ICO?

Initial Coin Offering is a form of fundraising where private investors can finance a project by buying related tokens. These tokens can be considered as a new cryptocurrency that will be available on the market when the project is launched. It is a source of capital for blockchain startups and can represent a right to use the future service.

But who guarantees that the project will be a success?

ICOs are risky and unregulated, generally there is no guarantee for the investor if the project will succeed or not. It is much more difficult for an investor to get an idea of ​​the relevance and quality of a startup rather than an existing company that has already marketed several products. In addition, many hackers use all possible and unimaginable phishing techniques such as identity theft to mislead the investor and steal his private keys during ICOs.

In 2018, Envion was among the Top 10 most important fundraisers. The company has accumulated $100 million with an initial parts offer (ICO) to more than 37,000 investors [2]. Their objective was to develop the cryptocurrency mining industry with mobile mining units. A few months later, the team announced to its investors that the transactions had failed. The founders accused each other, Michael Luckow (founding member of Envion) and Matthias Woestmann (CEO and shareholder) had both their side of the story. After a serious investigation, the Berlin prosecutor confirmed that the founder Michael Luckow won the injunction against Woestmann who was unable to access Envion’s assets for a potential selling of the company.

Another case in Vietnam an ICO raised over $660 million from 33,000 investors before the team disappeared, the largest ICO scam in history. Investors discovered later that the listed office was a front and has never been owned by the team.

The Canadian government has even created a fake ICO to educate people on the dangers of cryptocurrency scams. They published an article declaring that these cryptocurrencies could be used to pay for tourist visits and trips by mentioning that the token yield was 85%.

How to keep this source of capital but without ICO disadvantages?

Because of the many scandals, public has lost confidence in ICO. That is why security token offering have been created: unlike ICO that do not give any right to the holder of a token on the company, STO tokens are actual financial securities that offer legal rights to the owner, such as right to vote or distribution of revenue. Security Tokens are classified as securities, so they are bound by the securities regulations of the country they are operating in. On the other hand, STOs have been launched with a view to regulatory governance. They are registered with the required government agencies and meet all legal requirements.

A security token is therefore no longer a “useless” token but a token that includes some or all of the characteristics of a financial asset (for example, a share).
By Transforming tokens into stock market action, STOs will rekindle investor interest in blockchain and cryptocurrency projects. But, if it is a token that looks like an action, what is the point of having a token and not sticking to the actions that have been doing the job for centuries?

In reality, tokens have many advantages over conventional stocks. For start-ups and unlisted companies, this is a fascinating way to create liquidity and a secondary market: tokens can be traded very easily on a simple trading site.
Initial Exchange Offerings is the latest development: tokens of a project are initially sold directly on an exchange, to a fixed price and with a contribution per individual capped. The exchange acts as a sponsor on the IEO, as it has to conduct prior selling the token its own due diligence on the project. The best-known example of IEO is the BitTorrent token campaign.

New regulatory Framework to reaffirm confidence in cryptocurrencies

All these scandals have raised real questions about a regulatory framework that would make ICOs more reliable. The pace of change has been driven in part by incidents of cybertheft, trading halts, and possible market manipulation. Following a speculative boom in cryptocurrency prices, regulation of cryptocurrencies has been rapidly changing.
Countries have different approaches to how they regulate cryptocurrencies.

For example, the Korean Financial Services Commission prohibited ICOs in September 2017 and promised “stern penalties” for violations.

In Switzerland , the Regulator FINMA has taken a stance and published ICO guidelines in 2018 which create clarity for market participants and prevent circumvention of existing law. FINMA sets out how Swiss financial market laws will be applied for ICOs and that also applicability of respective foreign regulation needs to be assessed.

In France, the articles of the PACTE law relating to ICOs (articles 26 to 26 bis B) were definitively adopted on April 11, 2019, to mitigate the significant and inherent risks to investors. The content of the articles is intended to:

· Make the Financial Markets Authority competent to supervise the issuance of tokens that would fall outside the current framework

· Establish minimum legislative constraints

· Authorize financial markets to issue visas to players who comply with the constraints set, thus allowing investors to distinguish legitimate players and encouraging them to carry out their projects in France.

Conclusion

Despite their considerable advantages, the risks related to ICOs for investors and project leaders have led to a sharp decline in the use of this financing method over the past two years. The new laws in force tend to minimize the risk of fraud by providing a more regulatory framework, which should encourage the growth of STOs, guarantee confidence and increase the number of investments.

Sources:

[1] https://www.businessinsider.fr/plus-grosses-levees-de-fonds-crypto-monnaies-ico-2017

[2] https://envion-founders.org

Authors: Anne-Sophie Meyer, Mohammed Karim Bouarafa, Habibata Sanidié Touré

Habibata TOURE

Written by

Consultant in IT Advisory @BearingPoint FR — Working in IT Transformation projects

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