by Nuno Menezes
As the ICO, or initial coin offering, industry is now turning to the Kickstarter of the moment, governments are gazing at this new phenomenon with some concern. In an ICO, a startup sells tokens in exchange for cryptocurrencies. Basically, an ICO is a fundraising method in which companies attract investors looking score some more cryptocurrency by releasing their own coins. Now there is a movement pushing for a code of conduct for the disruptive fundraising method.
An ICO works as an initial public offering for a pre-determined product or solution. However, unlike a conventional Initial Public Offerings (IPO), an ICO uses digital currency as a mean of investment. This makes it immune to certain regulatory aspects that would greatly affect the ICO. However, this is rapidly changing as governments are now looking to regulate this sort of fundraising method. The Chinese government already approved a law that makes this type of investment illegal, and many other such as the Russian government, are now looking to implement regulation over coin offerings.
While critics of the model point out that investors are not afforded the same rights as in traditional capital market fundraisings, many voices within the community are now claiming for higher standards and more transparency in the growing ICO market. Alongside governments, a new movement wanting to implement a code of conduct for ICOs is on the rise. A proposal to bring transparency to the ICO market came out just days after China’s government declared ICOs illegal.
According to fnlondon, an online British News Agency, Crypto Valley Association (CVA) – a not-for-profit association supporting the development of blockchain technology – is producing a code of conduct for ICOs. With this, CVA is looking to underline the circumstances where regulation should be applied as a way to protect the end consumer.
Oliver Bussmann, the president of Crypto Valley Association, stated:
“There are ICOs initial coin offerings out there that I wouldn’t subscribe to. We need to find a way to make it sustainable. End investors need to be protected. Our view is that the ICO model, in itself, is a good one. It’s an easy way to raise money, and we can see the value.”
The CVA code of conduct aims to enable companies looking to raise money using cryptocurrencies to gain a trusted level of certification. Companies signing up to it will need to meet certain demands.
Governments React to ICOs
The National Internet Finance Association of China warned at the end of August that ICOs “may involve actions such as fraud, illegal securities and illegal financing.” A few days after this warning, Chinese authorities banned ICOs, sending the prices of many cryptocurrencies in the market into a sharp fall.
On the other hand, Russia seems prepared to accept ICOs and is already making a u-turn on cryptocurrencies after signs of backing from Vladimir Putin. The country is drawing up rules about how to conduct initial coin offerings. Last week, the Finance Minister Anton Siluanov told reporters the government in Moscow plans to regulate cryptocurrencies like securities.
Siluanov told reporters:
“The state certainly understands that cryptocurrencies are a reality, there is no point in prohibiting them. It is possible to regulate them, so the Finance Ministry will draw up a bill by the end of the year.”
Before Putin’s meeting with Vitalik Buterin, the legal status of cryptocurrencies was unclear. Since then, a company co-owned by the president’s internet ombudsman, Dmitry Marinichev, has announced a plan to raise $100 million in an ICO to fund a domestic digital currency-mining operation. This marks a complete reversal from the country’s proposal to outlaw bitcoin and punishes people using it with up to seven years in jail.
Meanwhile, the US Securities and Exchange Commission (SEC), has called for ICOs to be regulated like any other securities market.
Bussmann points out:
“Some treat ICOs as securities, but even that characterization means different things in different jurisdictions. It is our mission to educate and provide a reliable framework for ICOs. Banking is an area that is heavily regulated, and it reduces the ability for institutions to properly conduct business and to innovate. The worst case scenario would be that regulation could shut down the whole ICO industry.”
As the costs of achieving greater transparency and higher standards can bring regulation to implement rules that will act as hindrances to ICOs, different regulators have different opinions and giving different advice, which could lead to confusion.
In an interview with Finance Magnates, Vitalik Buterin, the founder of Ethereum stated:
“It would be a mistake to underestimate the value of ICOs or to say that they are a bad thing. ICOs are interesting because they enable monetization for open-source projects, something that doesn’t happen often. I created Ethereum itself with an ICO. What we are seeing lately is that people are taking this idea too far, and there are projects that issue a coin not because it makes sense to issue a coin but because they have a product they can sell and raise money.”