Is this a Déjà Vu?
Do you remember what you were doing in late 2013 – early 2014? I do, I was scrolling through my LinkedIn, Facebook, and Twitter feeds and it was all about Bitcoin. Bitcoin had recently crossed the $1000 threshold for the first time, and two days later one coin was worth almost as much as an ounce of gold. I remember reading about this and thinking, “This could shape our relationship with currency in the future, and even change the way we think about stores of value” – not an easy thought, especially for an economist.
However, we are not going to talk about Bitcoin today – at least, not specifically. We are going to talk about the hottest topic in crypto-land: Why tokens are eating the world.
It feels like Initial Coin Offerings (ICOs) are this year’s new big thing, right? Well, not really. They’ve been around since 2013, when Mastercoin was the first project to launch an ICO; but the one that forever changed the ICO landscape, and is one of the cornerstones over which the digital currency infrastructure has been developing in the past 4 years, was the Ethereum ICO in 2014.
Enough with the history lesson. Let’s get to the coin (and the token).
So… What are ICOs? And, Are They the Same as a Token Generating Event (TGE)?
There is no definite agreement on what tokens and coins actually are, and what is the difference between them – technically or regulatory wise – but in order to define ICOs and TGEs, let’s start with the subtle differences that both legal experts and developers have pointed out, and that are part of the proverbial crypto pool knowledge. For practical (and even marketing) purposes however, the media and industry seem to be using the terms interchangeably.
A coin, or an altcoin, is a variation of Bitcoin’s open source code. They act as simple stores of value, with limited-to-no-other functionality. A token, is a secondary asset built for a decentralized application (dapps) within a blockchain ecosystem. Tokens can store complex levels of value, and be programmed with different functions.
Now that we’ve covered the basics, let’s take a look at ICOs and TGEs. Initial Coin Offerings are a crowdsourced funding mechanism for a wide variety of businesses that typically include a blockchain component, and has become increasingly popular in the last 4 years. Technically speaking, ICOs are events in which the token sold is a mineable cryptocurrency.
Token Generating Events (a.k.a. Token Launches) are events during which a token that sits on top of an established crypto-network is sold. Token Launches or TGEs don’t promise investment returns, or profits. Rather, these events are focused on selling a digital asset that derives a clear use case for a decentralized application. The purpose of the token goes beyond being a funding mechanism, it is required to participate in the network by giving the holder access rights, use rights, or payment means within the particular ecosystem.
Most ICOs today can be more accurately described as Token Sales or Token launches, which are also the terms preferred by most good-faith technologists. Moreover, experienced digital-financiers recommend to avoid calling the event an ICO – though they recognize this term is the one feeding the current hype-cycle because it creates a parallel to the term IPO, even though the difference between an ICO and an IPO is BIG, the key fact is that tokens sold during an ICO do not represent an ownership interest in the project.
Brace Yourself – ICOs Regulation is Coming
Unfortunately, there has been a lot of speculation around the world as to the actual nature of Token Sales. Many have invested in these events with the wrong expectations, and others have taken advantage of the hype to build fraudulent pyramid schemes. And now, the regulatory cavalry is here.
Key financial regulators in different jurisdictions around the world have started leading the way – more like “ways” – by issuing official statements either supporting, banning, or simply recommending wariness to consumers regarding Initial Coin Offerings. But before jumping into the regulatory specifics, it’s valuable to understand where these different approaches are coming from.
Generally speaking, regulators jump in to protect consumers, to safeguard the stability of the country’s various systems, and to prevent crime and chaos. In the case of ICOs, the basic motivations are the same. Regulators around the world have issued guidance and bulletins recommending caution to investors, frameworks and requirements to those organizing ICO events to prevent fraud, money laundering, and terrorism finance, and are still trying to understand the consequences (if any) that these “new” funding mechanism would have on markets and monetary systems. Regulations (and their dreaded requirements) add enough friction to any process so that the pace at which an activity is occurring slows down enough for us mere mortals to catch up.
In China, the decision to ban ICOs altogether came from the People’s Bank of China, referring to ICOs as disrupter of financial stability that raises suspicion of fraud and criminal activity. In the United States, the SEC provided initial guidance on ICOs and Token Sales through a Report of Investigation on its findings regarding the Token Sales by The Dao in May 2016 and an Investor Bulletin on ICOs. The SECs involvement was long warned, and ultimately motivated by the similarities between tokens and securities in certain circumstances, and the lack of oversight and transparency over these events. The silver lining (or is it…?), is they did not go as far as categorizing all tokens as securities, so fundraisers now face the task of figuring out whether or not their scheme falls under existing securities laws.
The arguments for or against regulation are never simple ones, because societies are complex systems made up of humans. But regardless of which side you stand on (ICO regulation or no ICO regulation), the reality is that we have to play by the rules we’ve got, and in order to do so, we need to know them and understand them.
In matters of cryptocurrency, ICOs, and Token Sales, regulation is still playing catch-up with technology, so it isn’t always straightforward and evident which regulations you need to pay attention to, or from which jurisdiction. To help you navigate this complicated regulatory landscape we’ve reached out to some of the experts in the field and put together a webinar in which we’ll analyze applicable regulations and scenarios in different jurisdictions worldwide. The idea is to offer you a primer, so that you are better prepared to plan and carry-out your upcoming ICO.
On September 27th 2017, join:
- Angela Chartrand – Founder at Sentinence
- Sarah Hody – Associate at Perkins Coie
- Marco Santori – Partner at Cooley
- Neal Reiter (Moderator) – Director of Product at IdentityMind Global
- The Regulatory Framework in the US, Canada, China, and other countries around the world
- Is your token a security? – The Howey Test and equivalent mechanisms
- Jurisdiction questions between different Government Agencies
- What is a Regulatory Sandbox? – And why you want one
- What kind of compliance do you need to do?