ICO stands for Initial Coin Offering. Developers offer investors a limited amount of units in exchange for other major crypto coins like Ethereum or Bitcoin when launching a cryptocurrency or crypto-token.
ICOs can be used to quickly raise development funds for new cryptocurrencies. If there is enough demand, tokens can be traded on cryptocurrency exchanges.
The Ethereum Initial Coin Offering (ICO) is one of the most successful and recognizable successes.
A short history of ICOs
Ripple is most likely the first cryptocurrency to be distributed through an ICO. Ripple Labs developed the Ripple payment system in 2013. It generated around 100 billion XRP tokens. These tokens were then sold via an ICO to finance Ripple’s platform development.
Mastercoin, another cryptocurrency, sold a few million tokens for Bitcoin in an ICO that took place in 2013. Mastercoin was created to tokenize Bitcoin transactions, and create smart contracts.
There are many other cryptocurrencies that have been successfully funded via ICOs. Lisk raised approximately $5 million in 2016 during their Initial Coin Offering.
However, Ethereum’s 2014 ICO is the most well-known. The Ethereum Foundation raised almost $20 million by selling ETH at 0.0005 Bitcoin each during their ICO. It opened the door to the next generation of Initial Coin Offerings (ICOs) by leveraging the power of smart contracts.
Ethereum’s ICO is a recipe for success
The ERC20 protocol standard has been implemented by Ethereum’s smart contract system. It sets the rules for the creation of other compliant tokens that can be traded on Ethereum’s Blockchain. Others were able to create their own tokens that conformed with the ERC20 protocol standard and can be traded directly for Ethereum’s cryptocurrency.
DAO is an example of how Ethereum smart contracts can be used successfully. The $100 million investment company raised ETH. Investors received DAO tokens in exchange, which allowed them to participate in the governance and administration of the platform. After being hacked, the DAO was destroyed.
Ethereum’s ICO has announced the new generation of crowdfunding projects using Initial Coin Offerings (ECO) and their ERC20 protocol.
It made it easy to invest in ERC20 tokens. Simply transfer Ethereum, copy the contract and your new tokens will appear in your account. You can then use them as you wish.
While not all cryptocurrencies have ERC20 tokens, Ethereum’s network does allow them to launch Initial Coin Offerings.
The legal status of ICOs
It’s a confusing jungle when it comes to the legality of ICOs. Tokens can be sold as digital assets, but not financial assets, in theory. The majority of jurisdictions have not yet regulated ICOs so assuming that the founders have a seasoned attorney on their team, the entire process should be paperless.
Despite this, some jurisdictions are aware of ICOs. They are working to regulate them in a similar way as the sale of securities and shares.
In December 2017, the U.S. Securities and Exchange Commission (SEC), classified ICO tokens among securities. The SEC was preparing to stop ICOs that they believe are misleading investors.
In some cases, the token can be used as a utility token. The token can be used by the owner to access certain protocols or networks. In this case, they might not be considered financial security. Equity tokens that are designed to increase in value are close to security. Token purchases are primarily made for investment purposes.
ICOs remain in a gray legal area despite the best efforts of regulators. Entrepreneurs will continue to seek out Initial Coin Offerings until a more clear set of regulations is imposed.
It is also important to mention that once regulations are in their final form, ICOs could be less appealing than conventional funding options due to the effort and cost involved.
ICOs are still a great way to finance new crypto-related projects. There have been many successful ones and more to come.
Keep in mind that ICOs are being launched by everyone these days. Many of these projects are either scams or lack the foundation necessary to succeed. You should do your research on any crypto project that you are considering investing in. You can find ICOs on many websites. Just do a Google search and you will see a lot of options.