ICO is the abbreviation of 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 to quickly rain development funds to support 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 probably the first cryptocurrency distributed via an ICO. In early 2013, Ripple Labs started developing the Ripple payment system and generated about 100 billion XRP tokens. These were sold through an ICO to fund 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. Back in 2016, Lisk raised around $5 million during its Initial Coin Offering.
However, the Ethereum ICO that took place in 2014 is probably the most prominent so far. During its ICO, the Ethereum Foundation sold ETH for 0.0005 Bitcoin each, raising nearly $20 million. With Ethereum harnessing the power of smart contracts, it has paved the way for the next generation of Initial Coin Offerings.
Ethereum ICO, a recipe for success
Ethereum’s smart contract system implemented the ERC20 protocol standard that sets the core rules for creating other compliant tokens that can be transacted on the Ethereum blockchain. This allowed others to create their own tokens, in accordance 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 of ETH and the investors received in exchange DAO tokens that allow them to participate in the governance of the platform. Unfortunately, the DAO failed after it was hacked.
Ethereum’s ICO and its ERC20 protocol outlined the latest generation of crowdfunding blockchain-based projects via Initial Coin Offerings.
It is also made very easy to invest in other ERC20 tokens. Just transfer the ETH, paste the contract in your wallet and the new tokens will appear in your account so you can use them as you wish.
Obviously, not all cryptocurrencies have ERC20 tokens that live 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 sold as digital goods, not financial assets. Most jurisdictions do not regulate ICOs, so assuming the founders have an experienced lawyer on their team, the entire process should be paperless.
Even so, some jurisdictions have become aware of ICOs and are already working on regulating them in a similar way to 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 was preparing to stop ICOs that they considered misleading investors.
There are some cases in which 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 it cannot be defined as a financial security. However, equity tokens whose purpose is to appreciate in value are quite close to the concept of security. In truth, most token purchases are made specifically for investment purposes.
Despite the efforts of regulators, ICOs are still in a gray legal area and until a clearer set of regulations is imposed entrepreneurs will try to take advantage of Initial Coin Offerings.
It is also worth noting that once the regulations reach a final form, the cost and effort required to comply could make ICOs less attractive compared to conventional funding options.
For now, ICOs remain an amazing way to fund new crypto projects and there have been many successes 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 be worth the investment. For this reason, you should definitely do thorough research and investigate the team and background of any crypto project you might want to invest in. There are many websites that list ICOs, do a google search and you will find some options. .