Asia’s ICO landscape needs regulations and what startups can do to raise investor confidence

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Initial coin offerings (ICOs) and token sales are emerging as lucrative means of funding startups. Just over the past months, numerous blockchain startups have held token sales and ICOs. Companies are achieving quite the success as they meet and even exceed their targets.

New blockchain company Tezos just concluded its ICO and set a new record by securing US$232 million. A multi-platform API for a gaming infrastructure, Neverdie, is currently running an ICO for its NDC token, which had already raised US$2.1 million from its pre-sale. Identity platform Civic was also able to raise US$33 million in its token sale.

Essentially, ICOs work similarly to traditional initial public offerings (IPOs). But instead of stock, companies offer their own cryptocurrencies. Investors trade money for cryptocurrency tokens which they’ll eventually be able to trade once these currencies hit exchanges. Startups mainly hold ICOs for initial funding. Other more established companies do it for additional capital for expansion or to fund blockchain projects.

Investors beware

Despite all the excitement around ICOs, investors are warned to take caution.

To start, much like traditional investing, buying stakes in a company can be hit or miss. Many of these blockchain startups have yet to truly test their business models. While you can perform due diligence by checking out who is behind the company and what they are offering, there’s no assurance that you will eventually make any returns on the investment.

Aside from the business risk, ICOs are still largely unregulated. Unlike traditional IPOs where companies have to abide by strict securities and exchange regulations, ICOs are essentially free for all. Companies can readily create their own cryptocurrencies using a blockchain platform like Ethereum and conduct a token sale.

Some companies offer security in the form of smart contracts—a blockchain technology that enables parties to manage agreements transparently—to manage the terms of the ICO. However, smart contracts have yet to be legally recognized as binding by all territories, so there’s still plenty of risk for the investor.

Incidents of hacking regarding ICOs have already been reported. CoinDash’s ICO was hacked, allowing attackers to funnel US$7 million from ICO proceeds to their own accounts. Eros.vision is a blockchain startup that aims to create a decentralized marketplace for sex work. Critics have raised several red flags on the ICO especially since the company had a target of US$5 million despite having weak claims in its white paper.

A view from China

Yao Qian, director of China’s central bank, released a paper discussing his take on ICOs. He acknowledged that ICOs have become an important financing mechanism for startups. However, he also raised several concerns such as the lack of regulations and the challenge of valuation. He proposes a regulatory framework to facilitate ICOs, suggesting that projects should get inclusive exemptions from the strictness of traditional regulatory frameworks.

According to Qian:

“As a cutting-edge technology that could subvert various fields of society, the blockchain ecosystem has been evolving in Darwinian style at accelerating speed. Old and outdated blockchain technology and projects will be replaced by more advanced technology and business models. Cryptocurrency that has real value will eventually be recognized by the market and tokens with no value will be gradually eliminated. In this process, preemptive and excessive intervention by regulators will damage the market’s automatic clearing mechanism.”

Qian also suggests establishing measures such as creating a funding cap, making ICO financing management plans, having issuers disclose information, strengthening the role of intermediary platforms, allowing authorities regulatory intervention, and cooperating internationally to help protect ICO investors.

Slow acceptance

Regulation needed

Doing right by investors