What are initial coin offerings?

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The Economist explains | by

Proponents of cryptocurrency-based projects hope that they could one day replace today’s tech giants

Would you like to invest in Filecoin, a marketplace for digital storage services? Or Indorse, a professional social network where members own their data? How about Lust, a service “to enable all human beings on Earth to find their perfect sexual partner anonymously?” These are just three of a wave of what are called initial coin offerings (ICOs). More than $2bn has already been invested in such offerings since the first one, in 2013. And there is more to come: Smith + Crown, a consultancy, lists more than 200 ICOs on its website. What are they and why are they so successful?

The term ICO is somewhat misleading: these flotations are quite different from the similar-sounding “initial public offerings”, or IPOs, when startups list on a stock exchange. Whereas investors in shares receive ownership rights, those who put their money in ICOs get cryptocurrency, or tokens issued on a blockchain, an indelible distributed ledger of the kind that underpins bitcoin. They are meant to serve as the currency for the project they finance: to pay for storage space on Filecoin, for example. They can also be traded by speculators; investors hope that successful projects will cause tokens’ value to rise. In early August Filecoin raised $252m in just over 30 minutes. The ICO does not end until September 7th and yet its price has already more than quadrupled, to more than $6 (the price is determined by the level of demand, though the tokens cannot be traded during the ICO).

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Another big difference is that most ICOs are unregulated. Instead of providing an audited prospectus, for instance, issuers just publish a “white paper” which often describes the project’s aspirations in glowing terms. Regulators are getting antsy. In July America’s Securities and Exchange Commission said that the tokens issued last year by the DAO, one of the first ICOs, constituted securities—signalling to future ICOs that they may be subject to securities law. And even such crypto-currency gurus as Vitalik Buterin, the creator of Ethereum, the blockchain technology used by most ICOs, sees a bubble that is bound to pop one day.

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The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding stakeholders across the country. NCFA Canada provides education, research, leadership, support, and networking opportunities to over 1600+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada. Learn more at www.ncfacanada.org.

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