Ever since the madness of initial coin offerings (ICOs) ranging from late 2017 to early 2018, government regulations have been elusive and the path forward has been full of uncertainty for any crypto entrepreneur. ICO as a crowdfunding method adds more flexibility to other crowdfunding sources such as Kickstarter. Essentially, anyone who intends to raise funds for a project could issue “tokens” at a fixed starting price and they operate like loyalty points. No operational or live system is required for conducting an ICO because prospective investors are more concerned about future user growth than current situation. The early adopters of such tokens can get them at a discount and in turn profit off of the difference between the acquired price and market price when the tokens get listed on exchanges.
Unlike traditional fundraising schemes, ICOs are less restricted by regional regulations and the return on investment for these ICOs is much higher than “donating” your money to an interesting project on Kickstarter. Anyone can participate in an initial coin offering, and only your name and email are required in most sign-up processes. The freedom that ICOs bring to the current economy is something fledgling businesses desperately need in an environment where raising money becomes harder and more costly.
However, as 2018 rolled around, a handful of reports of scammy ICOs began to surface and some projects simply “disappeared” after a few rounds of fundraising. There are research studies that claim around 80% of ICOs in 2017 were scams. Moreover, people began to question the nature of these so-called “tokens” and compare them to equities–ownership of a company. Are ICO investors buying a share in the cash flows these projects will potentially bring? Because if so, these tokens would fall squarely under the regulations of the Securities Exchange Commission (SEC), and people behind these projects would need to file for issuance of securities under guidance of the SEC. This debate with regard to the nature of these ICOs has being going on for a while and investors have been anxiously waiting for the SEC’s stance on the crypto industry.
Perhaps, the wait has come to an end. Last week, the founder of EtherDelta exchange was charged by the SEC for operating an unregulated and unlicensed exchange. It could signal a new wave of crypto regulations coming our way and most ICOs are simply not prepared for that at all. These projects are in a precarious position where they are expected by investors to be on production schedule while facing growing concerns over the actions of regulators. However, on the bright side, the sooner the regulatory environment clears up, the sooner legitimate developers can put more focus on developing their projects without potential charges hanging over their heads.
Although most decentralized projects have bypassing authorities in mind from the onset, regulators simply can’t resist passing up on an opportunity to explore tax options on a potential trillion-dollar industry. Therefore, as crypto enthusiasts in a world of government regulations, we need to learn how to operate within the system and still effectively change the system.