Unregulated crowdfunding is one of the major innovations introduced by Blockchain technology. This system of fundraising conquers the barriers of class and location, enabling anyone at anytime to participate in ventures they believe in without going through the rigorous processes of previous systems.
The two sides of ICOs
For innovators and product creators, the ability to raise funds through token sales and Initial Coin Offerings (ICOs) simplifies their fundraising processes and opens their markets to greater opportunities in the global community. These benefits are responsible for the popularity that ICOs have gained since 2016. We have seen huge crowdfunding campaigns conducted using an ICO, and dozens of companies are raising anywhere from $10 mln to $300 mln in a matter of minutes and days. The total amount raised by ICO’s grew from $200 mln in 2016 to $2 bln in 2017.
The inability of governments and other financial authorities to control or regulate these ICOs is seen as one of the major reasons why the powers-that-be are reluctant to accept ICOs as a legitimate model of capitalization. Not only that, but some insincere, dishonest or unqualified players have been involved in shady ICOs that have left members of the community and regulators worrying about the genuineness of this novel innovation.
Other problems that are plaguing the general ICO system stem from the non-maturity of the technology, which is still in its initial developmental stages. This results in:
- No reporting standards
- No exchange listing standards
- Little to no regulation in most countries
All of the above makes participants in conventional financial markets face a major expectations mismatch when they try to move to the Blockchain.
Solving the problem of transparency
CEO of Orderbook, Andrey Zamovsky, acknowledges the existing ICO transparency problems and recognizes them as a setback that may be slowing down the development of the industry as a whole. However, Zamovsky notes there are existing solutions to these problems which he expects to be embraced by participants within the industry.
He elaborates on some of the solutions:
- Standards of reporting: Defining standards of reporting for ICO companies and making the reported data accessible directly from the exchange interface will enable participants to observe and understand the internal activities of ICOs. Such features will permit investors to access detailed information about the company that is behind a given token, such as jurisdiction of incorporation, type of financial instrument, recent news and so on.
- Due diligence: Conducting thorough due diligence prior to listing any token or cryptocurrency will enable investors to ascertain the actual existence and legal status of companies. A proper assessment of business models is required to make sure they are viable.
- Understanding of financial markets: As it stands, most of the financial instruments will be migrated to Blockchain in near future. All shares, bonds, swaps and other traded instruments have to be re-written as a smart contracts. To accelerate the migration, preference should be given to projects that are using time-tested instruments and are understood by conventional investors, over experimental utility token economy models.
Surviving with the technology
From the look of things, no matter the efforts of governments and regulatory agencies to ban or restrict ICOs, just like Blockchain technology and cryptocurrencies, they are here to stay. As the fintech world moves more and more towards decentralization, the only option seems to be finding the appropriate ways to ensure a clean investment ecosystem with respect to ICOs.
For the time being, inventing rules and regulations through central organizations would betray the essence of decentralization and only cause more friction within the community. Therefore, it is incumbent on both the companies and investors to embrace systems that will promote credibility within the ecosystem.
On the side of the companies, opting for openness and transparency will enhance their reputation and make them more attractive, while for investors, adopting the fundamental investigative approaches before choosing a product will save them a lot of losses and heartbreak.