What is an ICO in Cryptocurrency?

ICO is short for Initial Coin Offering. When launching a new cryptocurrency or crypto-token, developers offer investors a limited number of units in exchange for other major cryptocurrencies like Bitcoin or Ethereum.

ICOs are amazing tools to quickly get development funds to support new cryptocurrencies. The tokens offered during an ICO can be sold and traded on cryptocurrency exchanges, assuming there is enough demand for them.

The Ethereum ICO is one of the most notable successes and the popularity of Initial Coin Offerings is growing as we speak.

A brief history of ICOs

Ripple is probably the first cryptocurrency distributed through an ICO. In early 2013, Ripple Labs started developing the Ripple payment system and generated approximately 100 billion XRP tokens. These were sold through an ICO to finance the development of Ripple’s platform.

Mastercoin is another cryptocurrency that sold a few million tokens for Bitcoin during an ICO, also in 2013. Mastercoin aimed to tokenize Bitcoin transactions and run smart contracts by creating a new layer on top of existing Bitcoin code.

Of course, there are other cryptocurrencies that have been successfully funded through ICOs. In 2016, Lisk raised approximately $5 million during its initial coin offering.

However, the Ethereum ICO that took place in 2014 is probably the most prominent so far. During their ICO, the Ethereum Foundation sold ETH for 0.0005 Bitcoin each, raising almost $20 million. With Ethereum harnessing the power of smart contracts, it paved the way for the next generation of Initial Coin Offerings.

Ethereum ICO, a recipe for success

The Ethereum smart contract system has implemented the ERC20 protocol standard that sets the ground rules for creating other compatible tokens that can be transacted with on the Ethereum blockchain. This allowed others to create their own tokens, in compliance with the ERC20 standard, which can be exchanged for ETH directly on the Ethereum network.

The DAO is a notable example of the successful use of Ethereum smart contracts. The investment company raised $100 million worth of ETH, and investors received DAO tokens in return that allowed them to participate in the governance of the platform. Unfortunately the DAO failed after it was hacked.

The Ethereum ICO and its ERC20 protocol have outlined the latest generation of crowdfunding blockchain-based projects through Initial Coin Offerings.

It also made investing in other ERC20 tokens much easier. Simply transfer ETH, paste the contract into your wallet, and the new tokens will appear in your account for you to use however you like.

Obviously, not all cryptocurrencies have ERC20 tokens living on the Ethereum network, but almost any new blockchain-based project can launch an initial coin offering.

The legal status of ICOs

When it comes to the legality of ICOs, it is a bit of a jungle. In theory, the tokens are sold as digital goods, not financial assets. Most jurisdictions have yet to regulate ICOs, so assuming the founders have an experienced attorney on their team, the entire process should be paperless.

Still, some jurisdictions have taken notice of ICOs and are already working to regulate them in a similar way to stock and security sales.

In December 2017, the US Securities and Exchange Commission (SEC) classified ICO tokens as securities. In other words, the SEC was gearing up to stop ICOs they deem to be misleading investors.

There are some cases where the token is just a utility token. This means that the owner can simply use it to access a certain network or protocol, in which case they may not be defined as a financial security. However, equity tokens whose purpose is to increase their value are quite close to the concept of security. Truth be told, most token purchases are made specifically for investment purposes.

Despite the efforts of regulators, ICOs still remain in a legal gray area and until a clearer set of regulations is imposed, entrepreneurs will try to benefit from Initial Coin Offerings.

It is also worth mentioning that once the regulations reach their final form, the cost and effort required to comply could make ICOs less attractive compared to conventional financing options.

last words

For now, ICOs remain an amazing way to fund new crypto-related projects and there have been several successful ones with more to come.

However, keep in mind that everyone is launching ICOs nowadays and many of these projects are scams or lack the solid foundation they need to thrive and make it worth the investment. For this reason, you should definitely do some extensive research and investigate the team and background of any crypto project you want to invest in. There are several websites that list ICOs, just do a Google search and you will find a few options.