Initial Coin Offering (ICO)
The cryptocurrencies can be understood from xxxxxxx, but here we would explore a variant of cryptocurrency, known as ICO or Initial Coin Offering. ICO is a process through which a crypto-asset or digital token is created on a blockchain through a de-centralized software protocol. These ICOs have become a source for early stages of startups for crowdfunding or other fundraising activities through for these startups. These digital tokens can be exchanged with cryptocurrencies such as bitcoins or ethers.
These tokens might have different functionalities; in some cases, they might function as digital currency; in others, they might represent the real estate or gold. But some are unique and popularly known as AppCoins, which are the Blockchain tokens which can be used in new protocols and networks to create distributed applications. But the riskiest and speculative digital tokens are the ones that represent the parts of a speculative venture(s). These ICOs can be conducted on various blockchain-based decentralized applications such as Ethereum.
The advantages of issuing an ICO are as under:
- It provides economic and financial incentives for the blockchain network by giving it access to early funds.
- The ICOs give all the users to be part of the blockchain network and incentivizes them to start using the network from the beginning.
The ICOs can be classified into two broad categories, i.e., pre-release and post-release. The ICOs can be conducted both in fiat or digital currency or some combination of both. The pre-release occurs when the project or the blockchain network needs funds to develop the product, software, or service. Post-release ICOs happens when a(n) initial product or token has been launched and wants to raise additional funding to continue the development. Following steps shall be taken by the company to review to issue an ICO:
- Publish a detailed Whitepaper, along with a technical whitepaper or yellow paper, if imperative. The whitepaper shall contain a clear and compelling reason for the blockchain network and the digital token to exist. Clear and realistic expectations for the total distribution and supply of the tokens shall also be set.
- A detailed and realistic road map shall be given for the project. It shall contain time and estimates of costs and time for each stage of the project. The names of the advisors and key team- members of the project shall be made public. The proposed roadmap shall also include the allocation of funds that would be required at each stage of the project.
- The details regarding the private blockchain shall be given, and the steps as to how to become the part of the blockchain network shall be elaborately explained. But ideally, an open public blockchain shall be used, and the code for the project shall be published. This provides transparency and gives open access for the participation of the independent developers and token holders.
- This step is to use realistic, logical, and fair pricing for token sales. This step would also include the maximum number of tokens, which would be sold in the crowdfunding and setting up a price mechanism so that it does not increase over time.
- The final step is to determine the number or percentages of the token, which would be set aside for developers, marketing, advisors, and other members of the initial team.
Note: The tokens shall never be marketed as an investment as doing such would bring the tokens under the purview and ambit of SEBI (Security Exchange Board of India), which would end up defeating the purpose of issuing an ICO (if these need to be registered with SEBI).
The market for ICOs developed in the year 2017, which reached $5.86 billion dollars in that year and raised a whopping $1.4 billion in December of 2017 alone. This increase shall not solely be attributed to the utility and development pace of blockchain technology and network perse but to the psychology of humans who just saw them as money earning investments leading to the cryptocurrency bubble burst of 2018.
In India, the Supreme Court in IMAI vs. RBI[1] iterated that “Initial Coin Offerings (hereinafter, “ICO”) are a way for companies to raise money by issuing digital tokens in exchange for fiat currency or cryptocurrency, but there is a clear risk with the issuance of ICOs as many of the companies are looking to raise money without having any tangible products. In the year 2018, as many as 983 ICOs were issued, through which funds to the tune of USD 20 billion were raised.”
RBI had highlighted some of the possible ways to enforce the prohibition on VCs in the RBI Representation, which includes:
“Initial Coin Offerings (“ICOs”) ought to be prohibited, and VC asset funds may be allowed to be set-up and/or operated within the legal jurisdiction of India as also perform such transactions in India. ICOs that were in the nature of multi-level marketing or pyramid schemes can be banned;”
In conclusion, even though the ICO seems to be a good option for crowdfunding, these shall be meticulously strategized in all aspects so they do not violate any law or regulatory mandate.
[1] Writ Petition (Civil) No.528 of 2018
By
Siddharth Dalmia, B.Tech.(DAIICT)
