It is believed that for the first time to fund a startup, tokens were placed under a project called Mastercoin. This happened in 2013, and even then it was able to raise $ 5 million, which was a significant amount for a crypto crowdsale project. Together, different, completely independent of each other entrepreneurs found the necessary amount to invest in a new business, and this became the successful start of ICO as a strategy, which meant a fruitful beginning of an ICO cryptocurrency era.
Over several years, the development of ICO bitcoin business has reached such proportions that by the spring of 2018 there were over 1600 different cryptocurrencies in circulation. In addition, ICO has become interesting to investors and issuers in the real business sector. For example, the agricultural structure “Kolionovo” has achieved an investment in the amount of 401 bitcoins, which in conversion into US dollars amounted to $ 500,000. This transaction was also carried out through the use of ICO, which clearly showed its convenience in practical application.
Another Russian startup was also able to attract investment through an initial coin offering and blockchain technology, this time the company interested investors in the prospect of a payback in the production of zirconium dioxide. Thus, the tokens of the young ZrCoin corporation were able to enter circulation on the basis of the Wave platform. And in 2021, prominent representatives of the world of show business, sports and art can also engage in investment projects based on ICOs using the TokenStars platform.
ICO concept and its importance in the cryptocurrency market
Attracting investment is one of the topical issues for the cryptocurrency market. Finding a working strategy plays an important role in the successful implementation of an investor’s ambitions. To date, such a method as ICO (Initial Coin Offering) has proven itself well in this capacity. What is the interest in this investment method in 2021? Is ICO crypto worth paying attention to?
Despite the fact that in each country the economic situation may vary, many start-up entrepreneurs face the problem of financing their business, especially when it comes to the initial stage of a company development. Banks do not always provide start-ups with favorable lending terms, so the more popular way out in 2021 is turning to the ICO algorithm. Let’s consider the essence of this mechanism.
This phenomenon consists in the fact that investors are sold a specific amount of cryptocurrency obtained through emission, and it can be either one-time or accelerated. A characteristic feature of ICOs is the lack of legal regulation at the national level. In some cases, this aspect is considered positive, but it also has negative nuances: in some countries, for example, in South Korea, operations with ICOs are not legally allowed, but the authorities are thinking about legalizing activities based on blockchain technologies.
Speaking about the increasing importance of cryptocurrencies in general, one cannot fail to note the dynamic pace of development of the ICO strategy. According to the latest analytical data, back in 2016, in 1 week, on average, there were up to 1.5 ICO placements. A year later, in 2017, these numbers reached 2.75, which demonstrates the attractiveness of this investment model. Large market players began to show confidence in ICOs, among them such companies as the Swiss concern Status Research & Development GmbH, Switzerland, as well as Bancor and EOS can be noted.
Interrelation of ICO, cryptocurrencies and blockchain technology
At its core, ICO is closely related to blockchain technology, which is based on a replicated and distributed database. If a certain company has its own cryptocurrency, then the implementation of the initial offer of tokens can be performed through the emission of this cryptocurrency among interested buyers. The main task of the issuer, as well as the main difficulty on the way of obtaining money, is the ability to convince investors of the liquidity of their project.
In addition, if a novice businessman manages to negotiate with the financing party, he must guarantee that in the future he will definitely buy back the funds invested in his enterprise from the investor. The debt repayment period depends mainly on when the newborn business reaches the payback stage. And since bitcoin and ether are considered the most popular currencies, primary investments are also most often made in them.
How do cryptocurrency transactions work using blockchain technology? In order to carry out a financial operation, all transactions within the same network are grouped into blocks, and then turn into a chain called a “blockchain”. All subsequent blocks at the same time contain references to the previous blocks. The chain is highly informative, since it contains information about the amount of money transfers, about the senders and recipients of payments.
Mining is the addition of new information blocks to the general network. The purpose of this process is to perform computational functions, which usually results in the validation of an entire transaction block. For a person called a miner, this activity is accompanied by the emission of new tokens (or coins), while the user who was the first to add a block to the chain can be rewarded with a fixed amount of cryptocurrency.
The main risks associated with ICO
The seemingly attractive ICO investment attraction scheme also contains certain risks that an inexperienced issuer may not pay enough attention to. Nevertheless, you need to know about them in order to avoid future disappointments and negative consequences for your business. Let’s take a closer look at these potentially dangerous moments and list the most significant ones:
- investors do not have any specific guarantees;
- the percentage of fraudulent pyramids is quite high.
So, investor protection is a shaky ground where the most cautious entrepreneurs who avoid rash decisions are afraid to tread. Contractual relations are usually considered the basis for the correct legal interaction of the parties, but in this case, this legal component is absent. Neither the initiator of the project, nor the investor are protected from hypothetical infringement of rights, no one provides absolutely any guarantees to anyone.
In addition, there are also no even minimum requirements for the disclosure of information that is significant for decision-making, that is, an investor may not see the general state of affairs before investing a cryptocurrency in a startup, and the issuer will not be difficult to mislead the financing party about his project. There are no guarantees of fulfillment of oral obligations given by the entrepreneur to the investor. In the event of bankruptcy or liquidation of a legal entity, no one will pay the investor the bitcoins or other valuable cryptocurrency invested in the project.
As for the huge number of scammers who see ICO as a universal strategy for implementing their not entirely legitimate ideas, there are also a lot of them in this area. Statistics show that every 10th investor on the Ethereum platform faces fraudulent withdrawal attempts. In September 2017, the share of losses due to fraudulent activities with the initial token offering reached $ 225 million, and since then these figures have only grown.
A similar dynamic is observed in Asian countries, for example, in China. Under the pretext of investing in economic activity, a scheme with an ICO offer is often used for the purpose of circulating so-called surrogate funds, securities and bills of exchange. In the overwhelming majority of cases, these operations are illegal, but the invulnerability of fraudsters is still almost absolute, since their actions are not subject to legal sanctions.
Are ICO operations possible in Russia?
Any issuer and investor from Russia, of course, is interested in how to avoid a repetition of negative scenarios regarding ICOs that took place in some other countries, where the lack of legal regulation has led to a complete ban on any actions with cryptocurrency. On the territory of the Russian Federation, fundraising activities based on crowdfunding are inherently not prohibited, and ICO in a sense is a fundraising model similar to crowdfunding.
Russian government authorities and banks have developed a list of legal criteria according to which all projects with the involvement of ICOs are currently operating. This list, which is of federal importance and approved by the President of the Russian Federation as an Instruction dated October 21, 2017, includes the following fundamental requirements:
- the status of financial technologies (and the very concepts of “blockchain”, “token”, “cryptocurrency”, “initial offer of tokens”) should be clearly defined in order to substantively regulate all transactions involving digital developments;
- the organization of cryptographic production (mining) must also be presented with specific criteria for the implementation of this activity in order to avoid any discrepancies, ambiguous interpretations and the occurrence of other controversial issues;
- public placement of cryptocurrency tokens must be regulated only within the framework of the legal framework, so that transactions with them are not contested in court.
In general, banks are initiating the adoption of a Federal Law, which would allow more detailed control of operations with ICOs, make them transparent in a legal aspect, but at the same time not “choke” the sphere of cryptocurrency investments with excessively tough and unfavorable conditions for the parties. According to banking experts, the ideal balance will be between reasonable entrepreneurial activity and the protection of the legitimate interests and rights of investors when working with ICOs.