Initial Coin Offerings, or simply ICOs have become the go-to avenue for startups looking to disrupt the cryptocurrency market using the power of the distributed ledger technology. The word ‘decentralization’ has been the key concept driving most of these campaigns while others simply seek to tokenize just about anything.
As such, there has been a flurry of initial coin offerings, all launched with the promise of playing a key role in the future of the global financial markets. This has led to some people likening ICOs to a decentralized form of IPOs. Others have bullishly predicted that with the decentralization drive cutting across all markets including government organizations, parastatals and even stock exchanges, they could soon become the new IPOs.
The Difference Between ICOs and IPOs
The idea of multi-billion dollar companies choosing initial coin offering platforms to raise capital might seem alien to most traditional investors, but some companies have already explored this avenue, a good example being publicly listed Overstock.com (
And like tZero, most of the giant tech companies venturing into the cryptocurrency industry are only using ICOs to finance specific projects. This is slightly different from how IPOs work.
With an initial offer of common stock to the public, a company might state the specific reasons behind the capital raise including (expansion, to finance the development of new products, and even boost cash flows for operational purposes). However, once the capital raise is completed via an IPO, or a secondary offer to the public, there is no specific way of tracing the amount raised to the specific products as communicated pre-IPO. Investors do not invest in just the announced goals, but rather in the whole company.
The company can use the funds on other projects or reallocate the amount raised differently. It can also choose the cash to beef up its cash position in anticipation of short-term maturing obligations.
Furthermore, the level of scrutiny involved before a company is gifted the license to raise money from the public is mountains above what ICOs are subjected to. This provides a level of security to the investing public, which may not be guaranteed when investing in an ICO project.
Without a Government Watchdog, Investors Must Vet ICO Projects Themselves
While some governments have warned the public against investing in unvetted ICO projects, many are willing to take the risk as they angle for profits in the highly hyped crypto market. As a result, some have lost the entirety of their investments after becoming victims of highly marketed altcoin Ponzi schemes. Before investing in a cryptocurrency project, vetting is key. Whether you choose to use a trustworthy person who understands the market or to check out information about the project on a cryptocurrency blog that discusses altcoins, the process must be thorough. It should also resonate with your investment goals.
Some optimists of the crypto market base their arguments on the fact some stock exchanges led by Australia’s ASX (Australian Securities Exchange) have already made some key milestones towards taking stock trading to the blockchain.
Obviously, in a such a scenario where an entire stock exchange is based on a blockchain, it would make sense if capital raise or IPOs were done using the same technology, the blockchain. However, what some might forget is that even if companies were to raise capital from the public via a blockchain, that wouldn’t convert an IPO into an ICO.
Before getting to the stage where a company can proceed to raise capital from the public, the IPO applicant must gain approval from financial market regulatory bodies like the SEC (Securities Exchange Commission) in the U.S., the FCA (Financial Conduct Authority) in the U.K.’s LSE, and ASIC (Australian Securities and Investment Commission) in Australia’s ASX. Such regulators are currently not required for ICOs, and this makes them different but also at risk of being used by fraudsters.
Conclusion
One of the goals of the cryptocurrency market products is to get rid of the middleman and the watchdog, and instead, ensure security and trust prevail in the crypto markets by using a cryptographic system that pretty much makes everyone involved a watchdog. While some market experts have given their vote of approval of the power of the distributed ledger technology, some still question its applicability in markets where trillions worth of asset dollars are transacted globally, and daily.
This puts a massive cloud of doubt in ICOs potentially replacing the traditional IPOs market. The blockchain has helped in the disruption of many markets championed by its power to decentralize and distribute information immutably among all those involved in a blockchain project. Whether this technology eventually transcends to power the entire financial market remains to be seen.
Some cities like Dubai, in the U.A.E. have already launched ambitious plans to completely base all their transactions on the blockchain by the year 2020. However, that is beginning to look like a faint-hearted shot in the dark.
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