The Benefits of Regulation on Initial Coin Offerings (ICOs)
Given the rampant rise of ICOs this past year, we have heard a lot from U.S. regulatory agencies like the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). With the ease of gaining capital through an ICO, many companies have begun to rely on this process for quickly acquiring investors’ money in exchange for coin offerings. Investors take part in ICOs in hopes of turning a profit by selling the newly acquired coins on a cryptocurrency exchange. In 2018 alone, there have been over 700 ICOs which have raised a combined 20 billion dollars.
Startups or already established companies have the ability to build capital without having to sell off portions of their business (unless it’s a security token). Investors, whether accredited or not (this could possibly change with new regulations), have the ability to turn quick profits if all goes well. However, no such operation can exist in the U.S. without some type of regulatory oversight. Regulation on ICOs is well underway and it’s best to understand some of the benefits so that regulatory news won’t have negative impacts on the market.
State regulators in the U.S. as well as regulators in Canada have recently begun “Operation Crypto-Sweep” in an effort to essentially “sweep” out fraudulent ICOs. This regulation oversight is being revved up in order to protect investors. According to an investigation into 1,450 ICOs done by The Wall Street Journal, 271 of them raised at least one red flag. Plagiarized investor documents (such a copying a whitepaper from another ICO), promises of guaranteed returns, missing/faked teams, and a non-functioning website are all considered red flags. The SEC has even created a fake ICO with a functioning website and everything just to show how easily investors can be tricked. Regulation is needed to protect investors from erroneous ICOs as investors don’t have time to conduct extensive research into the very long list of coin offerings.
Once regulatory agencies have weeded out all the non-useful, just for profit, and plain out crappy ICOs, money from investors will flow into the prime ICOs. Such ICOs will have competent team members, a well thought out whitepaper, and most importantly: a valid reason for blockchain implementation. When these proper ICOs won’t have to compete against fraudulent ICOs for investors, the former will be better valued and more capital will be raised for their beneficial blockchain projects. Thus, regulation can actually streamline innovation in the blockchain space because money won’t be wasted into bad ICOs since there won’t be any to invest in (given that the regulators do their jobs properly).
To protect the investor and even those launching well organized ICOs, we need clear, concise, and correct regulation in the crypto space. Those who are launching ICOs need to have a good understanding of regulations so that the capital they need can be acquired and their game-changing blockchain ideas can come to life. It’s up to the regulatory agencies to do their jobs. If not done properly, we may soon see all ICOs only being available to accredited investors, or worse, ICOs being banned. Those behind the ICOs will only sell to accredited investors in order to avoid a lot of requirements set by the SEC.
In an article published by The WSJ titled “Regulatory Scrutiny Deflates Coin Deals”, the SEC has already sent out around 80 subpoenas and requests for information to multiple companies undergoing ICOs. We should expect this to be a consistent trend in the crypto space. Investors and enthusiasts should also keep track of previous, on-going, and up-coming regulations.
