What is an ICO?

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Since the release of mainstream cryptocurrencies like bitcoin and ethereum, they have become big business, with people creating their own all the time in a bid to become as valuable as possible. Bitcoin currently ranks as the most valuable cryptocurrency with each coin priced at approximately $11,000, but because these digital assets are so volatile, they are subject to big changes on a daily basis. As a way to get as many people interested in a cryptocurrency, many people use a method known as an Initial Coin Offering or ICO, which means to offer investors some units of a new cryptocurrency or crypto-token. ICOs are becoming a popular method to fund the development and research of new cryptocurrencies, and a lot of people insist that the first cryptocurrency distributed by way of an ICO was Ripple. It was in early 2013 when Ripple Labs started to develop the Ripple payment system, and in turn created approximately 100 billion XRP tokens, which the company then sold to fund the development of the Ripple platform.

Benefits of ICOs

One of the major benefits of ICOs is the fact that there are a plethora taking place each, which offer new technologies and imaginative ways to connect the host application with its token. Not only are there countless ICOs occurring each month, but it allows individuals and companies to release tradeable tokens in order to raise funds, and this method of raising capital could be used to completely rewrite how shares are distributed by companies.

Raising capital

When it comes to the process of raising capital, there is always some legal proceedings which closely follow, however the legalities of an ICO are still quite fuzzy. When an investors exchanges fiat money for a “token”, the token isn’t sold as a financial asset, but rather as a digital good like many other things, which is why you might hear an ICO being called a crowd sale. Currently the process of launching an ICO isn’t regulated, and this makes it very easy and paperless and allows companies to bypass a lot of the laws and regulations that come with the typical way of raising capital. The process is typically an easy one, where the company would produce what is known as whitepaper, and this is a plan which details the history of the company, their current standings, and where they intend to go if the ICO is a financial success.

Regulations

But given the fact that there is very little regulation, some jurisdictions have indeed become aware of such practices, and have taken necessary steps to regulate them in a similar manner to the sale of shares and securities. With more and more rules and regulations coming into place, and even though ICOs are currently held in a grey area regarding the legal requirements, in the future they will most likely have to follow financial regulations and have to jump through hoops. This in turn could have a knock on effect and companies may have to endure several costs in order to fully comply, which could lead to a reduction in the amount of ICOs in the future.

While a lot of ICOs in the past have criticized in the past, there have been quite a few that have been successful. Take the Golem project for example, which aims to create a decentralised supercomputer, where people can contribute their own computer power and earn money in doing so. Golem uses the ethereum blockchain for smart contracts, and the GNT token is used to pay for the services. Their ICO was limited to 820,000,000 tokens, where developers received more than 10,000 BTC.