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Fintech October 3, 2017

Initial Coin Offering – A Phenomenon in Making

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What were the ways you could think of while mulling raising of funds for your business? Until now, entrepreneurs could infuse their own money into their idea, could avail debt facility from a banking company, could reach out to retail investors/ institutional investorsthrough the share market or ask a venture capitalist or private equity fund to believe and finance an idea. The l andscape however is revolutionizing fast with the advent of blockchain technology.

Also read: Quietly Seeping Into Financial Infrastructure – The Blockchain

This change has come in the form of Initial Coin Offering (ICO), an instrument of raising money from retail investors by not going through the traditional stock market route. The catch here is that unlike offer of company’s shares which is a regulated sphere, offer of coins under ICO is unregulated and hence vulnerable to scams. That being a different story, let us first know how ICO works out.

The offering entity works on deciding the contours of the project as well as coin offerings. This includes preparing a project report on the probable outcomes of the venture and how many coins will be offered to public and the number that will be allocated to promoters. The coins offered are generally termed as ‘tokens’ and they are bought by interested backers by paying in officially recognized currency, say dollar or pound, and in some cases, Bitcoins (Also read: Underst anding Bitcoin). The tokens or cryptocoins serve the purpose of a stake owned by backer in the said entity and motivated by the prospect of a higher return if the venture turns viable in future.

A noticeable dissimilarity between ICOs and crowdfunding is while former involves stake owing by people who are only interested in commercial returns, in the latter there exists no defined mechanism for how the backers’ money may earn some dividend in case the venture proves to be a success. Crowdfunding can involve donations, ICO on the other h and is solely return-oriented.

Similar to share prices and price of most well-known digital currency, Bitcoin, value of these tokens/ cryptocoins fluctuates on the back of market conditions. A higher dem and for the tokens will lead to surge in value for the concerned stakeholder and vice versa.

The most celebrated case of successful Initial Coin Offering is one by Ethereum, which has termed its coins ‘Ether’. But the story isn’t so glossy. Many authorities that regulate and keep continuous watch on raising public money have warned investors of potential risks involved in buying cryptocoins. As ICO can be undertaken by any startup without even slightly caring for formalities involved in regulated market instruments like Initial Public Offering through stock exchange, investors here cannot knock the doors of any government agency in case the startup declines to honour its commitments.

The recent fall in value of many cryptocoins including Ether was an outcome of China declaring such products as forbidden. This however is in contrast with the enthusiasm linked to blockchain as a platform for smart contracts, a new-age solution where contracts will be stored digitally and will be immutable. Whether or not ICOs, based on the same blockchain platform, can emerge as a truly disruptive tech will only be known in due course.

Also read: Some Considerable Tips to Find Investors via LinkedIn

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2 responses to “Initial Coin Offering – A Phenomenon in Making”

  1. Kanak Khanna says:

    Like china, other countries will ban this method too. It is just a matter of time before a few investors are betrayed that this unregulated method of raising money will shut down completely

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