ICOs and the checks and balances of corporate governance

Regulatory ambiguity and technological complexities surrounding cryptocurrencies have long been contributing to its high volatility . It is no wonder uncertainty is rife around initial coin offerings (ICO) and the outlook of their investments in blockchain-based tokens.

In an attempt to restore investor confidence, ICO best practices have been debated extensively on the legislative front, but are by no means the only approach to dispelling misconceptions.

According to the 2018 Asean Corporate Governance Scorecard, corporate governance practices are beginning to stagnate in countries like Singapore, as well as a widening standard gap between large-capitalisation companies and the other players. In keeping up with a robust corporate governance framework for ICOs, both investors and corporation stand to benefit from an internal layer of checks and balances in token sales.

ICOs vs IPOs

Unlike initial public offerings (IPOs), ICOs lack the leadership of a board of director elected by shareholders as well as the oversight of a management team. This makes the enforcement of corporate governance challenging.

The risk and nature of both investments are also very different. IPOs represent ownership of mature companies with strong corporate governance, and investors enjoy the market liquidity as well as protection of security regulations. On the other hand, ICOs are like venture capital investments, such that the investment horizon is long-term.

In addition, token holders do not benefit from the same privileges as shareholders even if they may hold voting rights that come with the purchase of tokens. This is to avoid a conflict of interest as tokens can be traded freely in secondary markets while company shares cannot.

While tokens are currently often positioned as utility tokens, a move to security tokens, as regulations are implemented to govern the use of them, have the potential to ultimately replace the need for IPOs.

Playing it safe

Having in place measures that can help safeguard their interests and support crucial decision-making on investing will always be welcomed by investors. This includes a certain degree of disclosure and transparency in relation to financial, business and ownership matters.

Clear and thoughtful corporate governance structures are essential for the longevity of investments — be it for shareholders or token investors — for greater clarity on how the economics of the company will impact investment decisions. But as with all investments, token investors should also be cautious against any get-rich-quick schemes and will have to be responsible for their own decisions.

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