ICO stands for Initial Coin Offering. When launching a new cryptocurrency or crypto token, developers offer investors a limited number of units in exchange for other major crypto coins like Bitcoin or Ethereum.
ICOs are amazing tools for quickly raising development funds to support new cryptocurrencies. Tokens offered during an ICO can be sold and traded on cryptocurrency exchanges, assuming there is sufficient demand for them.
The Ethereum ICO has been one of the most notable successes and the popularity of Initial Coin Offerings is growing as we speak.
A brief history of ICOs
Ripple is probably the first cryptocurrency distributed through an ICO. In early 2013, Ripple Labs began developing the Ripple payment system and generated approximately 100 billion XRP tokens. They were sold through an ICO to fund the development of the Ripple platform.
Mastercoin is another cryptocurrency that sold several million Bitcoin tokens during an ICO, also in 2013. Mastercoin aimed to tokenize Bitcoin transactions and execute smart contracts by 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 approximately $5 million during their initial coin offering.
Nevertheless, Ethereum’s ICO, which took place in 2014, is perhaps the most famous to date. During its ICO, the Ethereum Foundation sold ETH for 0.0005 Bitcoin each, raising almost $20 million. With Ethereum harnessing the power of smart contracts, it paved the way for the next generation of initial coin offerings.
Ethereum ICO, a recipe for success
Ethereum’s smart contract system has implemented the ERC20 protocol standard, which defines the ground rules for creating other compatible tokens that can be transacted on the Ethereum blockchain. This allowed others to create their own tokens compatible with the ERC20 standard that could be traded for ETH directly on the Ethereum network.
The DAO is a notable example of the successful use of Ethereum’s smart contracts. The investment company raised $100 million worth of ETH and investors received DAO tokens in return, allowing them to participate in the management of the platform. Unfortunately, The DAO failed after being hacked.
Ethereum ICOs and their ERC20 protocol outlined the latest generation of blockchain-based crowdfunding projects through initial coin offerings.
It also made it very easy to invest in other ERC20 tokens. You simply transfer ETH, put the contract in your wallet and the new tokens will appear in your account so you can use them as you wish.
Obviously, not all cryptocurrencies have ERC20 tokens living on the Ethereum network, but almost any new blockchain-based project can launch an initial coin offering.
The legal status of ICOs
When it comes to the legality of ICOs, it’s a bit of a jungle out there. In theory, tokens are sold as digital goods, not as financial assets. Most jurisdictions have yet to regulate ICOs, so assuming the founders have an experienced lawyer on their team, the entire process should be paperless.
However, some jurisdictions have caught on to ICOs and are already working to regulate them in a similar way to sales of shares and securities.
Back in December 2017, the US Securities and Exchange Commission (SEC) classified ICO tokens as securities. In other words, the SEC is preparing to crack down on ICOs that they believe are misleading investors.
There are some cases where a token is just a utility token. This means that the owner can simply use it to access a certain network or protocol, in which case it may not be defined as a financial guarantee. Nevertheless, equity tokens whose purpose is to increase in value are quite close to the concept of security. To be honest, most token purchases are made specifically for investment purposes.
Despite the efforts of regulators, ICOs still remain in a legal gray area, and until a clearer set of regulations is imposed, entrepreneurs will try to capitalize on initial coin offerings.
It is also worth mentioning that once the regulations reach their final form, the cost and effort required to comply with them may make ICOs less attractive compared to conventional funding options.
For now, ICOs remain an amazing way to fund new crypto-related projects, and there are many successful ones yet to come.
However, keep in mind that everyone is starting an ICO nowadays, and many of these projects are scams or lack the solid foundation they need to thrive and be worth the investment. For this reason, you should definitely do your due diligence and research the team and background of any crypto project you would like to invest in. There are tons of websites that list ICOs, just do a Google search and you’ll find some options.