Plain Speaking on ICOs

Initial Coin Offerings (ICOs) have become very popular but they are also not without controversy. Like blockchain technology itself, there are many and varied uses and possibilities where digital tokens can be a force for good. From intrinsic tokens that allow blockchain networks to actually run (think of Bitcoin, Ethereum or Ripple) to asset-backed tokens that can represent legal rights (music, artwork), precious metals (gold) or finance (mutual funds), we are still in the exploratory phase, but it's fair to say that tokens are here to stay.

In order to get tokens into the hands of those who want to use them, they need to be issued, most often in exchange for value which is commonly used to fund the project itself. This issuance process has caused a lot of anxiety amongst regulators, tax authorities and others because, simply put, the process can look a lot like an alternative way to raise capital from investors outside of standardised, approved (and regulated) processes. While most may be well intentioned and managed through due process with the right legal advice, there are some bad apples and those who are looking to exploit the ICO approach for their own means.

It is also worth highlighting that there are differences between and ICO and an IPO – one of the most significant perhaps is that ICOs are normally used by enterprises that essentially only have an idea or a plan (which is explained in a “whitepaper”), whereas IPOs are typically used by companies with an already proven profitable track record.

As the ICO approach unfolds, there has been a gradual emergence of common/good practice. A good example is the Best Practices for Token Sales issued in December by the Fintech Association of Hong Kong. In addition, we are beginning to see some “institutionalisation” of ICOs whereby some of the traditional market participants begin to set down expectations, for example around Anti Money Laundering (AML), even where the legal requirements are not clear.

Issuing tokens is really an early step for an organisation that wants to be successful. It's really then that the hard work begins to bring the project to life, to establish a good business plan and model, to manage legal, tax and regulatory matters and to execute well to bring success and value. With so many entities issuing tokens in the last year, and more coming, it is inevitable that some will fail and some will succeed.

Those involved in ICOs should welcome what is likely to be a series of announcements and promulgations this year from regulators and relevant authorities. It will do much to help to dispel uncertainty around issuance and help to drive mainstream take up of this as a useful mechanism to promote new and innovative use of technology to drive growth.