The structure of ICOs (initial coin offerings) has many faults, from scammers to incompetent economic models, but what it doesn’t lack is money and support. So, what makes a legitimate, well-planned, and fully funded ICO fail? The 80-year-old regulations put in place by the U.S. SEC (Securities and Exchange Commission) might be a good place to start.
Protecting Investors is Not Working
While on the one hand, the SEC technically provides a filter for ICO scammers, it also blocks real businesses from proceeding with their blockchain technology by the high probability of getting sued. Plus, many fake ICOs run their scheme so quickly that they do not even make it to the stage where the SEC can prevent an economic loss for their investors. There is too much money (over $6 billion was raised in 2017) and too many scams (81% of ICOs are found to be fraudulent) for the SEC to catch them.
Old Regulations Unfit for Cryptocurrency Markets
The currency regulations used by the SEC still follow the outdated Securities Act of 1933 and do not provide a sufficient path for ICOs, blockchains, or the distribution of tokens or coins to follow. Many cryptocurrency companies use tokens rather than coins for their pre-ICO, which causes confusion when asked by the SEC if they are offering securities or utilities to their investors.
Security tokens require filing with the SEC as they appreciate in value while utilities simple offer future access to a service or product. Furthermore, security tokens can be used in a variety of ways such as rewards, stocks, or assets that can be exchanged for other currencies. To make matters more confusing, utility tokens can sometimes change into securities as the business model develops. Many startups, to avoid the issue and problems from the SEC, have simple refused funding from U.S. citizens.
Profitable ICOs Left in Limbo or in Disarray
Even when cryptocurrency startups try to follow the SEC regulations put in place, raise more than enough money, and have an effective business model, they are still blocked from proceeding because of the fear of being slapped with an expensive court hearing and legal fees.
Most recently, the Russian messaging service, Telegram, halted its launch of a public ICO after raising nearly $2 billion from private investment companies. The reason behind the cancellation of a public sale is unclear, but it is speculated that it is to avoid SEC probing and the fact that they raised more than enough money to fund their Telegram Open Network (TON). This means that the public will not have early access to and investment options in one of the largest ICOs to date. As large companies only have access to Telegram’s Gram token, unofficial and inflated deals will control the price of the coin and make it difficult to add it to an exchange and set a clear price.
In December 2017, another potential ICO in the profitable cannabis industry cancelled their ICO and launch of their platform due to the SEC uncertainties surrounding compliance of securities. They were able to refund all of the investments for the time being until the SEC gives them a green light. In the meantime, CEO Glen Ballman is glad that they decided not to proceed as new money transmitting laws may classify the company’s Dübercoin as a currency and a security, which is not allowed. The coin would be used within the cannabis industry to purchase cannabis and supplies as well as a reward system for in-network participation and sharing of information. With the cannabis industry flourishing and the inability to use credit cards and bank accounts, a cryptocurrency alternative is very badly needed to expand small business operations and make purchasing products easier.
Solutions for Security and Prosperity
It must be taken into account that the cryptocurrency market and its intentions as a technology-driven enterprise is not the same as a capital market of stocks and bonds. Concepts like tokens offer more than a monetary return on investment whether they are considered a utility or a security; success of the company is needed to receive both. Therefore, it is important to view cryptocurrency startups as investment in innovation not just return of profit.
Regardless of how you look at it, scams will exist if the motive is money. So, how do you spot a fake startup when there are so many who disguise themselves as innovators? By using the technology that cryptocurrency was based -upon: a Decentralized Autonomous Organization (DAO). Instead of government regulations that suspect anyone of wrongdoing, the crypto-community can regulate itself in a decentralized manner. This is already happening with networks like Wings and Dash that hold discussions and votes on potential startups and projects for funding.
While this exists in the crypto world already, people unfamiliar with the community-driven regulation system may still be tempted to invest in fraudulent ICOs. These people need to be more careful and invest their time in research before their money. The bottom line is that bad investments and scam artists should not be held against real companies trying to launch innovative projects.