ICO is short 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 such as Bitcoin or Ethereum.
ICOs are amazing tools for quickly raining development funds to support new cryptocurrencies. Tokens offered during an ICO can be traded and traded on cryptocurrency exchanges, if there is sufficient demand for them.
The Ethereum ICO is one of the most popular successes and the popularity of Initial Coin Offerings is growing as we speak.
A brief history of ICOs
Ripple is probably the first cryptocurrency to be distributed through an ICO. At the beginning of 2013, Ripple Labs started developing the Ripple payment system and created approximately 100 billion XRP tokens. It was sold through an ICO to fund the development of the Ripple platform.
Mastercoin is another cryptocurrency that sold several million tokens for Bitcoin during an ICO, also in 2013. Mastercoin aims to tokenize Bitcoin transactions and implement smart contracts through creating a new layer on top of the existing Bitcoin code.
Of course, there are other cryptocurrencies that have been successfully funded through ICOs. Back in 2016, Lisk raised approximately $5 million during their Initial Coin Offering.
However, Ethereum’s ICO that took place in 2014 is probably the most famous to date. During their ICO, the Ethereum Foundation sold ETH for 0.0005 Bitcoin each, raising nearly $20 million. With Ethereum harnessing the power of smart contracts, it paves the way for the next generation of Initial Coin Offerings.
Ethereum ICO, a recipe for success
Ethereum’s smart contracts system implements the ERC20 protocol standard that sets the core rules for creating other compliant tokens that can be transacted on Ethereum’s blockchain. This allows others to create their own tokens, following the ERC20 standard that can be traded for ETH directly on the Ethereum network.
The DAO is a great example of the successful use of smart contracts in Ethereum. The investment company raised $100 million worth of ETH and investors received in exchange DAO tokens that allowed them to participate in the management of the platform. Unfortunately, the DAO failed after it was hacked.
Ethereum’s ICO and their ERC20 protocol outline the latest generation of crowdfunding blockchain-based projects through Initial Coin Offerings.
It also facilitates investing in other ERC20 tokens. You just transfer the ETH, paste the contract in your wallet and the new tokens will appear in your account so you can use them however you want.
Obviously not all cryptocurrencies have an ERC20 token residing 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 traded as digital goods, not financial assets. Most jurisdictions do not yet regulate ICOs so if founders have an experienced lawyer on their team, the entire process should be paperless.
However, some jurisdictions are aware of ICOs and are already working to regulate them in the same way as the sale 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 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 only use them to access a specific network or protocol where they may not be defined as a financial security. However, equity tokens whose purpose is to appreciate in value are close to the concept of security. Admittedly, most token purchases are made for investment purposes.
Despite the efforts of regulators, ICOs still remain in a gray legal area and until a clearer set of regulations is imposed traders will try to profit from Initial Coin Offerings.
It is also worth mentioning that once the regulations reach a final form, the cost and effort required to comply will make ICOs less attractive compared to conventional funding options.
Currently, ICOs remain a unique way to fund new crypto-related projects and there are many successful ones with more to come.
However, keep in mind that everyone is launching ICOs now and many of these projects are scams or lack the solid foundation they need to grow and make them worth investing in. For this reason, you should definitely do thorough research and investigate the team and background of any crypto project you want to invest in. There are many websites that list ICOs, just search on Google and you will find some options.