ICO’s or Initial Coin Offerings have been around for a couple of years now and have since attracted nearly 9 billion dollars. Public interest to ICOs peaked in the second half of 2017, with Bitcoin and altcoins going steadily up and new companies popping up on the global map like mushrooms after a summer rain. In 2017 alone, the number of ICOs registered around the world was a little short of 900.

The very first ICOs looked like a perfect investment opportunity, but as their number grew out of proportion, so did the fraction of suspicious projects bordering on fraud and often fraudulent by design. The inflated risks eventually forced regulators to put their eye on this booming market and start working on recommendations and guidelines for investors, as well as legal compliance requirements for companies undertaking of planning ICO’s. With this in mind, let’s take a look at what’s going on the global market, where regulators are heading, and what we should expect to see out there in the months to come.

ICOs: investment opportunities and threats

The booming popularity of ICOs is largely based on the fact that they operate on a nearly unregulated market that is undergoing a phase of rapid growth fueled by a global hype. With virtually no rules defined for the market players, they can run their businesses using any schemes and models, including high-risk ones, to yield maximum returns and take full advantage of the situation. This approach has the potential of both making investors rich over a short period of time or bankrupting them just as quickly.

Most companies announcing ICO’s don’t have a product or service just yet. As a rule, they have a team of developers, consultants and advisors plus a white paper — a document outlining the architecture of the solution to be built. Some white papers rely on unique technologies or algorithms, some stress the business model that is destined for success, some attempt to combine the best of the two worlds and feature some big names that are supposed to aid the company on its way to stardom.

However, there is no rule of thumb for identifying clear winners early on. It usually takes investors a combination of luck, close follow-up and, perhaps, trust in particular individuals to place their bets.

In contrast to IPOs that issue stock to raise capital in fiat money, ICOs sell their coins or tokens for altcoins, which are very vulnerable to market fluctuations. It means that an unexpected landslide on the cryptocurrency market can dramatically set a company that has just completed its ICO back by months or even kill it if the set-back appears to be too serious.

Finally, the Gold Rush atmosphere on today’s market creates a fertile soil for all kinds of fraud and scam. Investors have already lost millions and millions to short-lived ICO’s organized with the sole purpose of raising funds and never living up to the promise of delivering a viable product or service.

Photos of renowned advisors suddenly disappear from official websites, feedback is no longer provided on the ICO’s community forums and one day, investors see a 404 error after typing the familiar address in their browser. Scam schemes can be more elaborate and draw inspiration from the practices of the notorious Charles Ponzi, letting organizers stay afloat for far longer until the flow of new investors wanes after several rounds.

The bottom line is that ICO’s are a risky business, especially if they are not backed by solid documentation, real people with reputation and public endorsement by industry experts.

Reasons for ICO regulations

Regulators were quick to react to the exponential growth of the ICO market. They had more than enough reasons for that:

Investor protection

ICOs provide everything necessary for mass manipulations and fraudulent schemes of all sorts. Governments and international financial organizations strive to protect the interests of individual and corporate investors.

Money laundering

ICOs belong to the crypto world with its lack of transparency and abundance of anonymity, which make it an uncharted territory for anyone attempting to track down a stream of money getting in and out of the system.

Terrorism

Without regulations, the crypto world bears way too much semblance to the Darknet which is always the primary suspect when it comes to illegal online activities. Full anonymity in crypto trading potentially enables terrorists to move funds across borders without anyone knowing.

Undermining of the investment culture

Traditional trading institutions have expressed numerous concerns about the practices employed by crypto traders that were out of line with traditional ones. ICOs form a Gold Rush attitude to trading, which produces a lasting adverse effect on the industry in general.

ICO regulations by countries

In general, ICOs are being treated with a fair amount of caution. Observance of AML (anti money-laundering) and KYC (Know Your Customer) principles is mandatory in every jurisdiction, but other regulative measure may vary. Some countries, like China, have completely banned ICOs as potentially fraudulent, while others are more open to the idea, requiring just basic compliance with regulations governing cryptocurrency trading.

The list of the most ICO-friendly countries includes Estonia, Cayman Islands, Gibraltar, Malta, Lithuania, Luxembourg, Switzerland, and Singapore. Let’s take a look at the situation in particular countries/regions.

United States:

The U.S. is divided over the definition of cryptocurrencies as securities or commodities, hence the divergence of opinions over ICO regulations. For instance, there is a tendency to treat Bitcoin and major altcoins as a commodity, making them the responsibility of the CFTC. Future tokens, on the other hand, are classified as securities and fall under the SEC’s jurisdiction. However, ICOs are allowed under the condition of registering and licensing the company and, if security trading is planned, obtaining a special license from SEC.

European Union:

The EU legislation had been extremely ICO-friendly until November 13, 2017, when the Securities Market Authorities presented a set of documents enforcing stricter regulations in relation to ICOs. In essence, it introduced a number of statutory requirements for companies performing ICOs.

United Kingdom:

The UK has been ICO-friendly all along, limiting its presence in the crypto-arena to official warnings about the risks of investing into ICOs. The official stance has been that ICOs are experimental in nature and investors should fully understand the risks of joining such ventures and act at their own discretion.

South Korea:

In spite of being one of the avid supporters of cryptocurrencies, South Korea has banned ICOs altogether in an attempt to protect its own population that is active enough to account for one-third of the global daily Ethereum trading and is the 3rd on the list of Bitcoin-trading nations.

Switzerland:

One of the best places for both cryptocurrency businesses and crypto-investors, Switzerland is planning to conduct a massive audit of the country’s ICOs and work out a set of regulations that will ensure the reliability and financial security of ICOs.

Japan:

Home to several major exchanges and extraordinarily active on the crypto market, the country is currently working on nation-wide ICO regulations that will enforce KYC/AML requirements and classify ICOs based on their business model.

Conclusion

The general agenda is clear and unambiguous: 2018 will be a year when most countries will finally make up their minds about ICO’s and will either ban them or provide a regulatory framework addressing the various aspects of their operation. Most states will insist on imposing more stringent statutory requirements and demanding maximum transparency from ICO holders — all for the purpose of protecting the interests of common investors and preventing large scale fraud schemes.