What Initial Coin Offerings Are, and Why VC Firms Care

The venture capital industry is beginning to take a good, hard look

at a new financial instrument coming out of the bitcoin community — Initial Coin Offerings, or ICOs. Also known as “token sales,” this new fundraising phenomenon is being fueled by a convergence of blockchain technology, new wealth, clever entrepreneurs, and crypto-investors who are backing blockchain-fueled ideas. ICOs present both benefits and disadvantages, as well as threats and opportunities, to the traditional venture capital business model.

Here’s how an ICO typically works: A new cryptocurrency is created on a protocol such as Counterparty, Ethereum, or Openledger, and a value is arbitrarily determined by the startup team behind the ICO based on what they think the network is worth at its current stage. Then, via price dynamics determined by market supply and demand, the value is settled on by the network of participants, rather than by a central authority or government.

Venture capitalists, who generally have been standoffish to the ICO phenomenon, are now becoming more interested in it for a number of reasons. One is profits — cryptocurrency investors made some massive returns in 2016, with cryptocurrencies from Blockchain startups Monero and NEM both seeing 2,000% increases in value. For example, the cryptocurrency used for the Ethereum network, called Ether, saw its value double in just a few days in March 2017. Yes, in three days, people who invested in Ether doubled their investment. Those investors can opt to cash out to a fiat-backed currency, or wait for the cryptocurrency to continue to rise (or fall). Volatility is a two-way street. While the price of Ether has been rising, Bitcoin has dropped 20% to $1,000 dollars from a record $1,290 on March 3, 2017.

The second reason VCs are becoming more interested in ICOs is because of the liquidity of cryptocurrencies. Rather than tying up vast amounts of funds in a unicorn startup and waiting for the long play — an IPO or an acquisition — investors can see gains more quickly, and can pull profits out more easily, via ICOs. They simply need to convert their cryptocurrency profits into Bitcoin or Ether on any of the cryptocurrency exchanges that carry it, and then it’s easily converted to fiat currency via online services such as Coinsbank or Coinbase.

What traditional investors don’t like about any of this is the regulatory uncertainty; the high valuations and over-capitalization; the lack of control over financials, strategy, and operations; and the lack of business use-cases. And like any industry, the ICO arena has had its fair share of outright scams, pump and dumps, and blatant Ponzi schemes. However, much of the criminal activity is now being mitigated by self-organized, crowdsourced due diligence in the community, as well as by external parties such as Smith and Crown, a research group focused on cryptofinance, and ICO Rating, a ratings agency that issues independent analytical research on blockchain-based companies. At least one VC firm is moving into cryptocurrencies. Blockchain Capital is set to raise its third fund via a digital token offering in the first-ever liquidity-enhanced venture capital fund (where people can invest without locking their money up for years on end) via a digital token called BCAP.

ICOs are the Wild West of financing — they sit in a grey zone where the U.S. Securities and Exchange Commission (SEC) and many other regulatory bodies are still investigating them. The main problem is, though, that most ICO’s don’t actually offer equity in start-up ventures; instead, they only offer discounts on cryptocurrencies before they hit the exchanges. Therefore, they don’t fit into the current definition of a security, and are technically outside of traditional legal frameworks. Secondly, they are global instruments — not national ones — and they are funded using bitcoin, ether and other cryptocurrencies that are not controlled by any central authority or bank. Anyone can invest, and they can even do so pseudo-anonymously (it’s not impossible to find out who people are, but it’s not easy, either). Currently, there’s no Anti-Money Laundering (AML) law or Know Your Customer (KYC) framework, though some companies are working on that. One example is Tokenmarket, a marketplace for tokens, digital assets and blockchain-based investing, that has teamed up with the Stock Market of Gibraltar to offer KYC- and AML-compliant ICOs.

Detractors of these new funding schemes scream for structure and protection, point out the scams, demand more control, and say that without equity, investors don’t have enough skin in the game. Meanwhile, proponents retort that there’s a real need for freedom to invest outside the accredited system, which sees the wealthy getting wealthier. They argue that the door needs to close on the domination of Sand Hill Road in Silicon Valley and other VCs and investors in the tech industry who have been making massive returns on the backs of entrepreneurs for far too long.

How Blockchain Works

Here are five basic principles underlying the technology.

1. Distributed Database

Each party on a blockchain has access to the entire database and its complete history. No single party controls the data or the information. Every party can verify the records of its transaction partners directly, without an intermediary.

2. Peer-to-Peer Transmission

Communication occurs directly between peers instead of through a central node. Each node stores and forwards information to all other nodes.

3. Transparency with Pseudonymity

Every transaction and its associated value are visible to anyone with access to the system. Each node, or user, on a blockchain has a unique 30-plus-character alphanumeric address that identifies it. Users can choose to remain anonymous or provide proof of their identity to others. Transactions occur between blockchain addresses.

4. Irreversibility of Records

Once a transaction is entered in the database and the accounts are updated, the records cannot be altered, because they’re linked to every transaction record that came before them (hence the term “chain”). Various computational algorithms and approaches are deployed to ensure that the recording on the database is permanent, chronologically ordered, and available to all others on the network.

5. Computational Logic

The digital nature of the ledger means that blockchain transactions can be tied to computational logic and in essence programmed. So users can set up algorithms and rules that automatically trigger transactions between nodes.

For blockchain startups, ICOs are a win-win — they allow startups to raise funds without having equity stakeholders breathing down their necks on spending, prioritizing financial returns over the general good of the product or service itself. And there are many in the blockchain community who feel that ICOs are a long-awaited solution for non-profit foundations that want to build open-source software to raise capital. Non-profits usually hold about 10-20% of the total cryptocurrency they issue; as Ethereum did in their ICO in 2014, with 20% going to the development fund and the remaining going to the Ethereum Foundation. This is so they have a vested interest in building more value, as well as having reserves for growth in the future. (As of March 2017, the market capitalization of the ether token was more than $4 billion.)

The market cap for bitcoin is now close to $20 billion, and half of that is allegedly owned by less than one thousand people, who are called “bitcoin whales.” Many of them are in China, but there are also hedge funds and bitcoin investment funds who hold massive amounts of bitcoin. Most made their money early on by buying or mining bitcoin when it was still under $10 (in the early days of 2011-2013). It’s now worth approximately $1,120 per bitcoin. These “bitcoin whales” are currently the ones who make or break many of the ICOs. Some of the enormous profits they have made in bitcoin are being channeled back into innovation, as many of them seek to diversify holdings, as well as support the ecosystem in general.

More than $270 million has been raised in ICOs since 2013, according to Smith and Crown (not including the $150 million raised in The DAO scandal, which was returned to investors). Since 2013, there’s been about $2 billion invested in blockchain and bitcoin startups from the VC community. ICOs are becoming more and more popular for startups seeking to get out of self-funding, bootstrapping starvation mode and avoid being locked in by venture capitalists, watching their own equity drown in a sea of financing rounds. ICOs are dominating the overall crowdfunding charts in terms of funds raised, with half of the top 20 raises coming from the crypto-community. In a recent conversation, MIT scientist and author John Clippinger described the vast potential of this new movement to me

as such:

One way of thinking about a crypto-asset is as a security in a startup, which begins with a $10 million valuation and becomes a $10 billion dollar entity. Instead of stock splits, the founding crypto-asset gets denominated in smaller and smaller units; in this case 1,000 to one. Here, everyone in the network is an equity holder who has an incentive to increase the value of the network. All of this depends upon how well the initial crypto-asset and its governance contract are designed and protected. In this instance, good governance, e.g. oversight, yields predictability, security, and effectiveness, which in turn creates value for all token holders.

Just as venture capitalists are taking a hard look at this new phenomenon, so should we all. It’s not just about the money that can be made; it’s also about funding blockchain projects and, in the near future, other startups and even networks, as Clippinger noted. We now have a way to easily fund open source software, housed under foundations rather than corporations, that can truly drive faster innovation. Right now, blockchain technology is at the stage where the internet was in 1992, and it’s opening up a wealth of new possibilities that have the promise to add value to numerous industries, including finance, health, education, music, art, government, and more.

Article Produced By
Richard Kastelein

David https://markethive.com/david-ogden

How to avoid getting duped by a bogus initial coin offering

• 271 initial coin offerings have appeared so far in 2018, according to Coindesk. In 2017, there were 340.
• In the last several years, investors have poured more than $12 billion into ICOs.
• Red flags include promising high investment returns and accepting credit cards for investors to buy in.

"There's a real chance the [Securities and Exchange Commission] or another regulator won't be able to recover your investment, even in cases of fraud," said Lori Schock, director of the SEC's Office of Investor Education and Advocacy.

An ICO involves the sale of digital coins or tokens, which are typically used to fund a project that involves blockchain technology. In simple terms, this technology — which underlies bitcoin and its crypto brethren — ensures that all transactions using it are secure. Some ICOs are pitching either a new cryptocurrency (i.e., the next bitcoin wannabe) or could be exchangeable for one that is planned by the ICO's promoters. Others might give investors the right to use the coins toward a product or service that

will be offered.

David https://markethive.com/david-ogden

South Korea’s National Assembly Makes Official Proposal to Lift ICO Ban

Nearly eight months after a blanket ban on initial coin offerings (ICOs),
 

The National Assembly’s special committee on the fourth industrial revolution even accused the government of ‘neglecting its duty’ in responding to the blockchain sector, the report suggests. The much-publicized ICO bans by Korea and China before it has seen an exodus of domestic companies going to friendlier jurisdictions in Singapore and Switzerland to conduct ICOs.

Discussions on blockchain and ICOs between the National Assembly and the government will ‘accelerate’, the report suggests. More pointedly, the National Assembly has put forward a legislative and policy proposal to recommend allowing ICOs. The committee on the 4^th industrial revolution also called on the government to form a task force comprising of both public officials and private experts to “improve transparency of cryptocurrency trading and establish a healthy trade order.”

It further stated:

“The administration also needs to consider setting up a new committee and building governance systems at its level in a bid to systematically make blockchain policy and efficiently provide industrial support. We will also establish a legal basis for cryptocurrency trading, including permission of ICOs, through the National Assembly Standing Committee.”

The legislative effort first came to light earlier this month when a group of lawmakers led by Rep. Hong Eui-rak of the Democratic Party of Korea – the ruling government – began drafting a bill to legalize the launch of new ICOs in the country. “The bill is aimed at legalizing ICOs under the government’s supervision[…],” he said at the time. “The primary goal (of the legislation is helping remove uncertainties facing blockchain-related businesses.”

The embracive turn follows recent remarks from the new chief of Korea’s financial watchdog who has chosen to put the spotlight on the “positive aspects” of cryptocurrencies while suggesting authorities will relax cryptocurrency curbs in what is among the world’s largest crypto trading markets.

Article Produced By
ICO News

https://www.ccn.com/south-koreas-national-assembly-makes-official-proposal-to-lift-ico-ban/

David https://markethive.com/david-ogden

Crisis: After $30 Billion Invested, Most Crypto ICOs Have Nothing to Show

Over the past two years,

initial coin offering (ICO) projects in the crypto market have raised more than $30 billion. Yet, most ICO projects have little to show, especially pertaining to user growth, blockchain adoption, and overall user activity on decentralized systems.

It Will Only Get Worse

A handful of tokens have demonstrated success in establishing clear vision, growth paths, and valid use cases of blockchain technology that benefits users. Binance Coin (BNB), for instance, which already operates as the base cryptocurrency of the Binance exchange, will be extensively utilized to process peer-to-peer trades upon the launch of the Binance decentralized exchange (DEX). Tens of thousands of merchants have also recently started to use BNB to accept crypto payments.

0x (ZRX), the native cryptocurrency of the 0x decentralized exchange protocol, is necessary to facilitate liquidity amongst many decentralized exchanges that operate on top of the 0x protocol. While there are several tokens in the market that represent viable applications of the blockchain, the vast majority of projects have ambiguous roadmaps and long-term strategies.

As Uber’s Sam Gellman said:

“After $30 billion invested in the past two years in ICOs there still isn’t a single crypto app with a real user base for anything other than speculating on crypto. The BTC price movement is tough, but the lack of real user base for anything they’re investing in is tougher.”

With regulatory hurdles set forth by the U.S. Securities and Exchange Commission (SEC), the ICO ecosystem will become even more difficult for both innovators and projects. This week, the U.S. SEC cracked down on two ICO projects called AirFox and Paragon, characterizing their token sales as unregistered security offerings and requesting the two tokens to refund all of their investors. “They have also agreed to compensate investors who purchased tokens in the illegal offerings if an investor elects to make a claim. The registration undertakings are designed to ensure that investors receive the type of information they would have received had these issuers complied with the registration provisions of the Securities Act of 1933 (“Securities Act”) prior to the offer and sale of tokens in their respective ICOs.”

The U.S. SEC emphasized that it is in support of the blockchain and the usage of newly emerging technologies. But, the commission said that market participants must acknowledge and adhere to local regulations. “We wish to emphasize, however, that market participants must still adhere to our well-established and well-functioning federal securities law framework when dealing with technological innovations, regardless of whether the securities are issued in certificated form or using new technologies, such as blockchain.

Importance of Bear Market

The bear market of 2018 will filter good projects from the bad, and those that survive will be projects that have a clear vision, roadmap, active user base, and a competitive model. As the capital in the market drops, investors who previously invested in every new project in the market will become more cautious and it will be challenging for token sales without competitive strategies to appeal to the public. Over time, as investors learn to conduct due dilligence and the market evolves into a more competitive sector, underperforming projects will naturally see a decline in investment opportunities, user activity, and demand.

Article Produced By
Blockchain News

https://www.ccn.com/crisis-after-30-billion-invested-most-crypto-icos-have-nothing-to-show/

David https://markethive.com/david-ogden

University of British Columbia Study: ‘Compliance Trilemma’ Limits
Potential of ICOs

Initial Coin Offerings (ICO) are facing a regulatory
“compliance trilemma,”

according to a recent study released Nov. 19. The research, funded by regtech platform iComply and “supported by” Canadian non-profit national research organization Mitacs Canada, was carried out by the University of British Columbia (UBC).To prepare the report, UBC’s research team investigated the ICO space over the course of six months, focusing primarily on North America, but also delving into some other countries and jurisdictions. The team conducted 45 qualitative interviews with individuals in the ICO space, including representatives of the finance, law, and science sectors of the field.

Per the study, ICO issuers face a “trilemma,” wherein they can only address two of three objectives at a time, those being “having a compliant offering,” “reaching a distributed pool of investors,” in a manner that is “cost-effective.” The researchers define compliance as following regulations in the home jurisdiction of both the issuer and investor. While a broadly distributed pool of investors is said to be the principal benefit of an ICO as a funding mechanism, the cost of complying with financial regulators becomes “much greater” if the investor pool becomes more distributed.

“If issuers forgo these costs, the risk of being non-compliant rises significantly. The result is a trilemma, whereby issuers currently must forgo one of these goals to realize the other two, or to compromise on all three,” the study explains. The trilemma further reveals four basic approaches available to ICO issues, which are “the Maverick ICO,” “the Private ICO,” “the Hybrid ICO,” and no ICO at all. The first option refers to ignoring compliance for maximizing ICO reach and cost effectiveness, which reportedly runs a huge risk of regulatory enforcement.

The second approach focuses on targeting only accredited and institutional investors by sacrificing distribution, which may not affect cost-effectiveness but raise challenges in secondary market trading control. Regarding the Hybrid ICO, the report reads that it “compromise[s] on all three dimensions by issuing in select markets, resulting in bounded cost effectiveness, compliance and investor scope,” resulting in a combination of risks.

The researchers found that companies wishing to undergo an ICO sought relief from the trilemma through relevant regulatory authorities. Participants in the study reportedly called for amendments to regulation, including clarifications of existing regulation and development of “fundamentally new” regulatory definitions and frameworks. The study concludes that this “trilemma” has “substantially limited [the] potential” of ICOs,

noting:

“Many actors with legitimate ventures that could benefit from ICOs are likely holding back, due to combination of confusion over how exactly they might comply with financial regulations within and across jurisdictions, and the prohibitive costs of doing so manually.”

As Cointelegraph recently reported, ICO performance in the third quarter of 2018 was in part characterized by “overall disappointment," in comparison with previous quarters. Last week, Cointelegraph reported that in a self-described “first,” the U.S. Securities and Exchange Commission (SEC) had imposed civil penalties against two ICOs over their failure to register their token sales with the agency.

Article Produced By
Ana Alexandre

Total change in her career took Anastasia into the world of analytics and business information as a researcher and translator in 2010. Some time later she got into FinTech, a dynamically developing segment at the intersection of the financial services and technology. Ana joined Cointelegraph in September 2017.

https://cointelegraph.com/news/study-compliance-trilemma-limits-potential-of-icos

David https://markethive.com/david-ogden

What is an ICO, Exactly?

From Wall Street brokers to small time investors,

finance can be a dangerous game. The world’s currencies are constantly in shift, falling in and out of favour, and the results can often be disastrous (or highly fortuitous) for those involved. People win and lose big. That’s a fact of life, and it’s no different when cryptocurrencies are involved instead of regular cash. Having taken the world by storm in the past decade, the blockchain tech behind Bitcoin, Litecoin and other altcoins has changed finance – and money itself – forever. But how does one go about bringing a virtual currency into existence? Well, that’s where ICOs come in.

A Dictionary Rundown

An ICO is an initial coin offering much similar to an IPO. An initial public offering involves a new company selling shares to investors, the process underwritten by an investment bank. The company stocks are then listed on various markets. When it comes to an ICO however, no stocks or shares are sold.

Instead, it’s all about coins.

When somebody wants to launch a new cryptocurrency they’ll advertise its perks with something called a White Paper, then ask for investment from the public. Interested parties then donate existing cryptocurrency, such as Bitcoin, and in return receive some of the first rounds of, let’s say, ProfitCoin. The hope is that ProfitCoin will gain popularity, be used a lot, and as such rise in value. The investors will then, well, make a profit from their ProfitCoin ICO. Either way, they’re supporting the ecosystem and development of cryptocurrency in general.

ICOs vs Standard Investing

But why bother with an ICO? There are stocks, gold, oil, salt and pepper to be bought and sold after all. Forex already exists. Why venture into this new zone of risk and exploration? Well, put quite simply, because you may regret it otherwise. How many tech savvy folks and investors are kicking themselves for not jumping on the Bitcoin bandwagon years ago? With ICOs, said folks now have a second chance to find the next cash cow. It’s a gamble, yes, but a relatively informed one if you take the time to research. If you were to head over to the Paddy Power Casino, make your deposit, get your bonus and take to the roulette table, for example, you’d be taking a similar informed risk. You can work out the odds, see the potential for a win, and decide whether or not to take it.

An ICO is similar, but instead of knowledge of cards or probability, you need knowledge of the cryptocurrency world. You need to read the new coin’s White Paper first things first, and then you can decide whether or not to go ahead.

The All Important White Paper

An ICO White Paper is the cornerstone of any new coin campaign. It lays out what this new currency can offer that others have not, it explains how the idea works, why it works, and why it’s better than what’s come before. It is, in essence, a business pitch; interesting, thorough, well-explained. A White Paper is addressed first and foremost to you, and to other potential initial coin investors around the globe – so best brush up before trading in your precious Bitcoin for ProfitCoin. The world of finance changed when cryptocurrency came into existence, even more so when it grew into a global market. Now the world of crypto is changing thanks to ICOs, and with every White Paper comes a new opportunity to win big.

Article Produced By
FinSMEs

http://www.finsmes.com/2018/11/what-is-an-ico-exactly.html

David https://markethive.com/david-ogden

What Is An ICO Token
And How Does It work?

What’s the definition of crypto token?

It's an entity with a value specified by the eminent. If it's a fashion startup, one token can be equal to one dress or a yearly license of a software in case of a hi-tech startup. You even can issue tokens of yourself and a token holder will be able to buy an hour of your work with the token. You can “tokenize” everything.

What’s the difference between cryptocurrency coins and tokens?

This is a difficult part. The easiest answer: tokens are not a currency. You don’t need to create a Blockchain to issue tokens, which is a must-have for a cryptocurrency, but you use an existing one (usually Ethereum, which was originally created as a platform for smart contracts and evolved to be a currency). A coin is a money equivalent, something that defines value and serves as a value transfer. A token is a symbol of a contract, the value does not depend on mining, gold price or any dynamic market criteria. A friend of mine once gave me a note saying that he will always make me a coffee on demand. He still does it, after 10 years, it was a heck good token!

What is a token contract and how does it work?

Ok, a token is not a coin, got it. But still, something should regulate it’s transaction, value etc? How does that work? You do need a platform for it. Let’s take Etherium as an example, since its one of the most popular platforms for smart tokens.

Here is the full contract cycle:

1. Tokens creation: a company writes the basic rules (tokens amount, token value, special conditions). Once created the platform will serve as a very smart notary for all the future transactions, making sure all the conditions are carried out.
2. Tokens acquisition: when somebody wants to buy a token, the process is really similar to buying a coke in a vending machine. You approach a machine, drop the coin and push the button “coke” (choose the token you want to buy). The machine checks if there are “cokes” in stock and if you are eligible to buy it. If everything is fine- you get your drink (or token in our case). The machine says “have a nice day” and updates the stock info (one coke less now).
3. Token transaction: In case you have a coke, you can just pass it to your friend. For money or for free. In tokens reality, you have your token wallet which is supported by the same platform that issued the token. You can transfer your token using the wallet. And again, a virtual notary, powered by a smart contract, will make sure you do it according to the rules. Moreover, all the wallets activity is constantly recorded and being updated.

Is all this free? Nope. Somebody needs to pay for the notary, vending machine technician and coke delivery. In the token world – the operation processing called “gas.” So, each time you ask to buy or sell tokens, there will be some “gas” spent and you will pay its fee.

Note: the fee is not static. It depends on a number of transactions awaiting. You can define the max cap you are willing to pay for your gas. If the token cost is, say, $10 and the gas fee is $20 is not a great deal, isn’t it? So, you can say that you pay no more than $2 for your gas, click “submit” and find something else to do meanwhile. The system will serve the highest gas bids first and eventually yours when your time will come. There is a chance, you will wait for a long time (if others are willing to pay more than you). But you always can rise the gas cap.

Types of tokens

Let’s see the most common types of tokens.

Token – token (Utility tokens), the most popular type

Remember amusements parks from the childhood? Roller coasters, carousels, hot dogs and cotton candy? At the entrance, you’ve got tokens to buy food and enter the attractions. So, let’s pretend that a company is an amusement park and with the tokens, you can buy different services just as you do with carousels and hot dogs. Now, to make the analogy perfect, let’s say that you can buy lots of tokens before the park is officially opened, or when it’s just opened. If the park becomes popular, its tokens will be much more expensive. Like $10 for a hot dog. But a smart child who bought the tokens before the opening will still enjoy his meal for $1. This is basically the idea behind issuing and buying tokens. But if in the amusement park you buy the tokens at the entrance, where do you get a cryptocurrency token? The answer is ICO – Initial Coin Offering.

Token – stock (Equity tokens)

In this case, ICO is completely equal to IPO. Usually, token-stocks are issued when a startup does not require a crypto-technology. In this case, token holders will get dividend or fixed commission. They also will be able to take part is the company decisions. All this honor for supporting the project in the beginning of its life.

Token – credit

This is a loan; a holder gives to a startup. It’s another way to rise money. For example, you invest X to get X + 10 percent.

Token – combo

If you are not completely confused, you will be now: sometimes a token can belong to more than one type. For example, tokens Sia and Digix are both tokens and stocks. And Steemit has all the three types of tokens (Steem, Steem Dollars (SBD) and Steem Power (a denomination of VESTS).

How do you trade tokens?

This part is pretty similar to coins. You have to register on an exchange for buying and selling tokens. The transaction conditions can be really complicated: the contract can include multiple rules like “you can sell it only before a specified date” or “after some date but only for a certain vendor.” So, when investing in tokens, you should read the “small letters” really thoroughly.

Article Produced By
Cointelegraph

https://cointelegraph.com/ico-101/what-is-an-ico-token-and-how-does-it-work

David https://markethive.com/david-ogden