The cryptocurrency wave has taken the world by storm. Bitcoin showed the way initially when it introduced a decentralized system of transactions that were not operated or regulated by a financial institution or a government agency. The blockchain technology, which uses a public ledger system, requires users to participate in the validation of transactions, pending which new tokens of the cryptocurrency are created. While cryptocurrencies have surely attracted widespread attention, ICOs attract far more attention, since they help people earn good money in quick time. Governments are a little wary of this, with many of them handling the process in their own way.
What is an ICO?
An Initial Coin Offering (ICO) is a form of crowd-funding. The creators and developers of a start-up offer investors tokens of cryptocurrency or some rights in the business at low rates. The developers assure the investors that the cryptocurrency that they are selling them is essential to the operation of the business. Investors then buy a chunk of these cryptocurrency tokens, thinking and hoping that the business will grow soon and sustain itself in the future. When that happens, they know the demand of the cryptocurrency tokens they purchased will increase, along with the price at which they sell.
This makes it a lucrative prospect for investors since they know that they can earn huge profits on their investment in a short amount of time. The ones hosting the ICO raise a lot of money in as little as a day. To put things into perspective, so far in 2017, more than $2 billion has been raised through ICOs.
The investors who become a part of ICOs know that investing in an ICO has its own risks, not just from a business point of view.
- The business idea might not live up to its expectation, and the money of investors becomes a loss rather than a profit
- The ICO is hosted by a fake company to trick people into giving them money
- The ICO is hosted by people who wish to fund a criminal or terrorist organization
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The last two points are a big cause for concern, prompting governments all over the world to take action against ICOs.
How Governments are Regulating ICOs
Governments all across the globe are trying to get a stronghold on the ICO process, to protect investors and people from falling prey to fraudsters and prevent misuse of cryptocurrencies for nefarious purposes. While some of them are still figuring out how to deal with them, countries that see a good volume of cryptocurrency trading have taken action already.
- China banned ICOs altogether earlier this month as the country wanted to prevent mischief using ICOs. They ordered anyone who had raised funds through an ICO to return the money to investors and banned all subsequent ICOs
- USA’s Securities and Exchange Commission has issue rules that ICOs must follow and thoroughly investigates the companies and individuals behind an ICO before it is hosted. The SEC prevented two ICOs in July. One was stopped because the SEC was investigating the owner of the company, while the other company said they had put a halt to the launch because they wanted to review and revise their strategy. The SEC hasn’t banned ICOs, but it has rules to determine when and when not is a cryptocurrency a security issue in an ICO.
- The Monetary Authority of Singapore has taken similar action as the SEC. It has stated that if the tokens offered in an ICO are products as per the Securities and Futures Act, then they must follow its guidelines
While these are the most decisive actions against ICOs, other governments are also proactive in warning their citizens about the dangers involved. Canadian Securities Administrators issued a staff notice in August where they informed the fintech sector that new digital currencies would be considered a security. The Securities Commission Malaysia also issued a public warning informing people about the dangers involved in ICOs. However, supporters of ICOs believe that all these actions won’t affect ICOs, and are simply the governments’ ways to understand the process better. With many more ICOs held all over the world since these announcements, that looks to be true.