What is a cryptocurrency ICO?
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 cryptocurrencies such as Bitcoin or Ethereum.
ICOs are amazing tools for quickly raining down development funds to back new cryptocurrencies. The tokens offered during an ICO can be sold and traded on cryptocurrency exchanges, assuming there is sufficient demand for them.
The Ethereum ICO is one of the most notable successes and the popularity of initial coin offerings is growing as we speak.
A brief history of ICOs
Ripple is likely to be the first cryptocurrency to be distributed through an ICO. In early 2013, Ripple Labs began developing the Ripple payment system and generated approximately 100 billion XRP tokens. These were sold through an ICO to finance the development of Ripple’s platform.
Mastercoin is another cryptocurrency that sold a few million tokens for Bitcoin during an ICO, also in 2013. Mastercoin aimed to tokenize Bitcoin transactions and execute smart contracts by creating a new layer on top of the existing Bitcoin code.
Of course, there are other cryptocurrencies that have been successfully funded through ICOs. In 2016, Lisk raised approximately $ 5 million during its Initial Coin Offering.
However, the Ethereum ICO that took place in 2014 is probably the most prominent yet. During its ICO, the Ethereum Foundation sold ETH for 0.0005 Bitcoin each, raising almost $ 20 million. With Ethereum harnessing the power of smart contracts, it paved the way for the next generation of Initial Coin Offerings.
Ethereum ICO, a recipe for success
The Ethereum smart contract system has implemented the ERC20 protocol standard that sets the ground rules for creating other compatible tokens that can be realized on the Ethereum blockchain. This allowed others to create their own tokens, which are compliant with the ERC20 standard that can be exchanged for ETH directly on the Ethereum network.
The DAO is a notable example of the successful use of Ethereum smart contracts. The investment company raised $ 100 million in ETH and investors received DAO tokens in return that allowed them to participate in the governance of the platform. Sadly, the DAO failed after it was hacked.
The Ethereum ICO and its ERC20 protocol have outlined the latest generation of blockchain-based crowdfunding projects through Initial Coin Offerings.
It also made it easy to invest in other ERC20 tokens. Just transfer ETH, paste the contract into your wallet, and the new tokens will appear in your account so you can use them however you want.
Obviously, not all cryptocurrencies have ERC20 tokens that live on the Ethereum network, but virtually any new blockchain-based project can launch an Initial Coin Offering.
The legal status of ICOs
When it comes to the legality of ICOs, there is a bit of a jungle out there. In theory, tokens are sold as digital goods, not financial assets. Most jurisdictions have yet to regulate ICOs, so assuming the founders have an experienced attorney on their team, the entire process should be paperless.
Still, some jurisdictions have become aware of ICOs and are already working to regulate them in a manner similar to the sale of stocks and securities.
In December 2017, the US Securities and Exchange Commission (SEC) classified ICO tokens as securities. In other words, the SEC was preparing to stop ICOs that it sees as deceptive investors.
There are some cases where the token is just a utility token. This means that the owner can simply use it to access a certain network or protocol, in which case they cannot be defined as a financial guarantee. However, stock tokens whose purpose is to revalue are quite close to the concept of security. Truth be told, most token purchases are made specifically 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, entrepreneurs will try to benefit from Initial Coin Offerings.
It is also worth mentioning that once the regulations reach their final form, the cost and effort required to comply could make ICOs less attractive compared to conventional financing options.
Last words
For now, ICOs are still an amazing way to fund new cryptocurrency-related projects and there have been several successful projects with more to come.
However, keep in mind that everyone is launching ICOs today and many of these projects are scams or lack the solid foundation they need to thrive and make it worth the investment. For this reason, you should definitely do a thorough research and research the equipment and background of any crypto project you want to invest in. There are several websites that list ICOs, just do a Google search and you will find a few options.