14. August 2018.
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ICOs: a new way to raise capital and a profound financial innovation or part of the hype around cryptocurrencies?

Initial coin offerings (ICOs) are the crypto-community’s answer to an IPO. Also known as token sales or token generation events, they are a new way to raise money by selling coins, virtual currencies or tokens.

Payment ICOs are where the tokens function as a means of payment and can be transferred. Asset ICOs involve tokens which confer rights of ownership of an underlying tangible or intangible asset. Utility ICOs involve tokens which have no value or purpose outside of the platform. They confer rights to digital products or services at issuance or in the future.

To add to the confusion, some tokens are hybrid in that they combine any of the above. Tokens can also start off as one type and transform over their lifetime. There has also been deliberate naivety and obfuscation in the naming conventions to get around the fact that companies are issuing securities, not utilities. And to avoid falling within the purview of existing securities regulation.

How crypto-assets are classified differs between jurisdictions and sometimes even within jurisdictions. Iceland and Lebanon see them as electronic currency. In Columbia, Norway, Singapore and South Korea among others, they are not currency. While in Germany, they are financial instruments.

The US Commodity Futures Trading Commission (CFTC) regards cryptocurrencies as commodities. However, Jay Clayton, chairman of the US Securities and Exchange Commission (SEC), is on record as saying “I believe that every ICO I’ve seen is a security.” If a company has control over the monetary supply of its crypto-asset, and the value of the token is based on the performance of the company, the token is a security, according to Clayton.


“Regulators, policy makers and tax authorities are all struggling to figure out the best way of regulating and taxing cryptocurrencies,” says John Salmon, partner at law firm Hogan Lovells. “Some jurisdictions, notably China, have completely banned cryptocurrencies. Others are looking to put in place specific legislation and regulation. Most, however, are looking to apply existing rules and regulations.”

These countries are variously treating cryptocurrencies as an asset, a product or a currency. How it is treated is important as some are applying VAT to cryptocurrencies, whereas most are treating them like any other assets so that they would be subject to capital gains tax.

It is a similar story around initial coin offerings (ICOs). “Each jurisdiction has its own rules on the particular scenarios in which an ICO should be subject to the regulatory regime and many different regulations could apply, which is the situation in Europe,” says Salmon. “These rules are often complex in themselves and were not designed for ICOs.”

The short-term outlook for cryptocurrencies is hampered by the lack of a consistent global approach. The legal grey areas and uncertainty notwithstanding, a regulatory land-grab is underway. A number of countries, including the Cayman Island, Gibraltar, Isle of Man, Malta, Mauritius and Switzerland, are known to be drawing up frameworks for formally policing the space to attract business.

Whilst this is interesting, it is perhaps more significant what the main, market-moving jurisdictions think and do. At a hearing in February 2018, the SEC made it clear that ICOs will be met with tighter regulations, while true cryptocurrencies will be embraced with smart policies. It has followed through on this by clamping down on a number of companies, whose conduct constituted unregistered securities offers and sales. US ICOs have slowed as a result.


The wait-and-see approach by many regulators may, in effect, bring about a degree of self-cleansing and self-regulation. Required to comply with legislation around anti-money laundering and countering terrorist financing, banks are cautious around the KYC aspects of anonymous virtual currencies.

It is a strange irony that what began as a libertarian quest for a means of exchange that did not rely on banks or a centralised system, may come back to exactly that. Regulators may regulate the points of entry for cryptocurrency, namely exchanges, banks and financial institutions.

A niche, new money that originated among computer enthusiasts, political activists and the crypto-scenti, is also going mainstream among venture capitalists, funds and family offices. The more traditional investors are gradually getting involved, precisely because these trust-less currencies are becoming more trusted,

namely regulated.

However, the volumes traded today are small — a mere rounding error for many of the larger banks. Mark Carney, governor of the Bank of England who also chairs the Financial Stability Board, summarised the position when he said “crypto-assets do not appear to pose material risks to financial stability.”

Even at their recent peak, their combined global market capitalisation was less than one percent of global GDP. In comparison, at the height of the dotcom mania, the valuations of technology stocks were closer to about a third of global GDP. And just prior to the global financial crisis, the notional value of credit derivative swaps was 100 percent, said Carney.


The biggest barrier to widespread adoption of digital currencies is the incumbent-monies problem. Almost everyone in the world is already using money. There has to be a compelling reason to switch to overcome the switching costs and network effects. The three Rs (rules, rights and relationships) of existing payment systems are also hard to replicate. For the majority of users and use cases, the status quo works well enough.

Cryptocurrencies are unlikely to have much impact at retail point of sale for the foreseeable future. The majority of examples in this space are more for marketing than volume. However, the next generation of payment systems could well be built on top of cryptocurrencies. This opens up the world of tokens, which link values managed on shared ledgers to the real world. New money could well be based around tokenomics rather than cryptocurrencies.

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