An ICO is a short initial coin offering. When they launch a new cryptocurrency or crypto-token, developers offer a limited number of units to investors in exchange for other major cryptocurrencies like Bitcoin or Ethereum.
ICOs are amazing tools to quickly rain development funds to support new cryptocurrencies. Tokens offered in an ICO can be sold and traded on cryptocurrency exchanges, assuming there is sufficient demand to do so.
Ethereum is one of the most notable ICO successes and the popularity of Initial Coin Offerings is growing as we speak.
A brief history of ICOs
Ripple is likely to be the first cryptocurrency distributed through an ICO. In early 2013, Ripple Labs began developing the Ripple payment system and created approximately 100 billion XRP tokens. These were sold through an ICO to fund the development of Ripple’s platform.
Mastercoin is another cryptocurrency that sold 1 million tokens in an ICO, also in 2013. Mastercoin aimed to tokenize Bitcoin transactions and implement smart contracts, creating a new layer on top of the existing Bitcoin code.
Of course, there are other cryptocurrencies that have been successfully funded through ICOs. In 2016, Lisk raised about $5 million in its Initial Coin Offering.
However, Ethereum’s ICO in 2014 is probably the most notable to date. During their ICO, the Ethereum Foundation sold ETH for 0.0005 Bitcoin, raising nearly $20 million. Harnessing the power of smart contracts, Ethereum paved the way for the next generation of initial coin offerings.
Ethereum’s ICO, a recipe for success
Ethereum’s smart contract system has established the ERC20 protocol standard, which sets the ground rules for creating other enforceable tokens that can be transacted on Ethereum’s blockchain. This allowed others to create their own tokens, complying with the ERC20 standard that can be traded directly with ETH on Ethereum’s network.
The DAO is a prominent example of the successful use of smart contracts on Ethereum. The investment company raised $100 million worth of ETH and investors received DAO tokens in exchange, allowing them to participate in the governance of the platform. Unfortunately, the DAO failed after being hacked.
Ethereum’s ICO and its ERC20 protocol have defined the latest generation of crowdfunding blockchain-based projects through Initial Coin Offerings.
It was also very easy to invest in other ERC20 tokens. You simply transfer the ETH, stick the contract in your wallet and the new tokens appear in your account for you to use as you wish.
Of course, not all cryptocurrencies have ERC20 tokens living on the Ethereum network, but almost any new blockchain-based project can launch an Initial Coin Offering.
Legal status of ICOs
It’s a bit of a jungle when it comes to the legality of ICOs. In theory, tokens are sold as digital goods, not financial assets. Most jurisdictions have yet to regulate ICOs, so assuming the founders have a seasoned lawyer on their team, the entire process should be paperless.
However, some jurisdictions have become aware of ICOs and are already regulating them similarly to the sale of stocks and securities.
In December 2017, the US Securities and Exchange Commission (SEC) classified ICO tokens as securities. In other words, the SEC was gearing up to stop ICOs that they consider misleading investors.
There are some cases where the token is just a utility token. This means that the owner can use it to access a particular network or protocol, in which case it may be defined as financial security. However, equity tokens that appreciate in value are quite close to the concept of security. In reality, most token purchases are made specifically for investment purposes.
Despite the efforts of regulators, ICOs remain in a gray legal area and until a clearer set of regulations is in place entrepreneurs will try to profit from Initial Coin Offerings.
It is also worth noting that once the regulations reach their final form, the costs and effort required to comply may make ICOs less attractive compared to traditional funding options.
Last words
For now, ICOs remain an amazing way to fund new crypto-related projects and have had multiple successes with more to come.
However, keep in mind that everyone is launching ICOs these days and many of these projects are either scams or lack the solid foundation they need to thrive and be worth the investment. This is why you should definitely do your due diligence and research the team and background of any crypto project you want to invest in. There are several websites that list ICOs, do a Google search and you will find a few options. .