After several criticisms of ICOs and cryptocurrencies, from facilitating black market activities and cyber crime to being part of ponzi schemes, ICOs may be back in the firing line. Whilst Russia has already put plans in place to legalise the ICO, it may be backtracking a little, with China also taking steps to reduce public exposure to risk. This news comes at a time when Luxembourg has issued a warning against OneCoin, and the warning from the U.S. Securities and Exchange Commission about companies who use ICOs to pump up stocks.
ICOs: The Good and Bad
An Initial Coin Offering (ICO) is a method of crowdfunding to facilitate the launch of a new cryptocurrency or tech development. A crowd-sale of a crypto asset is a term one could use. An ICO uses this cryptocurrency to raise capital by issuing an asset specific to an application or service on a general blockchain (such as applications on the Ethereum blockchain) or one that exists as its own blockchain (like the Tezos token).
The unregulated nature of an ICO lends itself well to companies and small start-ups wanting to avoid the tenuous, overbearing and restrictive regulations of IPOs. Tokens do not represent a share of the equity of a business, and they do not confer ownership; meaning a CEO or investor does not need to reduce his ownership of the company. The freedom that ICOs currently possess enables small start-ups to seek much-needed capital.
Some difficulty comes with this. Firstly, unlike IPOs, companies that have yet to produce any real or tangible results are raising massive sums through ICOs, due to the unregulated nature of the ‘listings.’ Fundamentally, this presents an issue whereby individuals could be pitched an idea that is easily overstated or unrealistic, due to the lack of regulatory oversight and auditing. This facilitates reckless investing.
Second, stemming from the lack of regulation and the fact that having tangible results is not necessary for an ICO, there is a serious opportunity for ICOs to be fraudulent. There are also Blockchain based difficulties: namely, that the decentralised – and often anonymised – transactions present a borderless operation.
Since most ICOs are not connected to any particular jurisdiction, backers may not have any resources should an issuer choose to abscond with their money. It is on this topic that governments are taking a stand.
With China building up a home-grown cryptocurrency, Neo (formerly Antshare), the draft regulations take focus on cryptocurrencies that attempt to subvert state power through illegal financing. The Legislative Affairs Office of the State Council- the executive Branch of the Chinese government – has released a draft bill on illegal financing which covers a broad range of methods that companies must guard against. Of particular interest is the focus on Article 15 which targets ‘virtual currency,’ in fundraising. Specifically, an interdepartmental committee can investigate any act of fundraising ‘without proper permission, or one that violates the relevant provisions of the state…’. The definition of fundraising is
“to raise funds in the name of issuing or transferring equity, raising funds, selling insurance, or engaging in asset management activities, virtual currency, leasing, credit cooperation and mutual funds…”
As a result, such regulation can clearly be seen to target potential ICOs, putting further pressure on the industry. Such regulation comes at a time when there is still outrage over the deaths of students at the hands of pyramid scam gangs. The threat of heavy punishment at the hands of the Chinese government could cause concern for ICOs, whether or not they are legitimate.
The time and effort that must be expended into complying with investigations would negatively impact a small team, with larger teams having to be more certain about the effects of their ICO, perhaps ensuring that only vetted investors take part.
As the world’s largest cryptocurrency market, China is a hotbed for trading cryptos- thus, any regulation could alter the title it holds. Recently, Neo secured a position in the top 10, complementing China’s position as the largest e-commerce market as the currency begins to see usage. Further, China is also in a transitional period and is experiencing substantial innovation and growth- from being the country with the second highest number of unicorns (at 45, in Beijing) to their ambitions of being the global AI leader in 2030.
Russia and Bitcoin: Souring Relations?
Despite the Russian Government showing support earlier for the legalisation of ICOs, The Moscow Exchange is working to regulate virtual currency whilst the Russian Finance Ministry says Bitcoin resembles a pyramid scheme. Deputy Finance Minister Aleksey Moiseev stated that:
‘There is a point of view that cryptocurrencies like Bitcoin are a financial pyramid. It’s hard to argue with this point of view. The investments are very risky.’
The Deputy Finance Minister is pushing for the creation of a platform that would protect buyers and sellers, ensuring the execution of contracts and limiting trade to qualified investors. Such a status and restriction could impact Bitcoin usage in Russia, requiring persons to have at least six million rubles on somebody’s account ($100,000), make at least 40 transactions a year with a turnover of six million rubles, or work for at least two years in a financial institution that trades securities. Undoubtedly, this will restrict public access to the platform based on the view that trading Bitcoin is a dangerous investment.
This stance is, however, at odds with reports that companies utilising power plants in Russia are leasing excess power to bitcoin miners. Such agreements have the potential to open larger Bitcoin farms, as almost 30% of the cost goes to energy expenses. With cheaper and more available energy becoming available, this could supercharge mining and increase Bitcoin’s prowess. Farms like Gazprom and EuroSibEnergo state that participants want to gain an edge over China and provide larger competition by utilising Russia’s cheaper energy rates.
Furthermore, a company co-owned by Russia’s Internet Ombudsman Dmitry Marinichev purports to have raised over $100million through an ICO, with plans to use the funds to ensure Russian entrepreneurs can challenge China’s Bitcoin mining superiority.
With future regulations seeking to limit trading to qualified investors, Russia may be attempting to strategically make the market more appealing to wealthy individuals and high net worth investors, hoping to attract more money and secure a bigger percentage of the cryptomarket.
Undoubtedly, unregulated trading of cryptocurrencies has the potential to adversely affect uninformed investors, abusing the hype created in recent months by the rise of ICO ‘mania’. However, such restrictions have the potential to undermine investor sovereignty. Yet, despite previous setbacks, cryptocurrencies have the power to adapt, and it is likely reactions in the market will soon be seen. Other markets (including Vietnam) are either waiting, or taking action, to legalise the ICO and recognise cryptocurrencies. One thing, however, is certain: the ‘cryptosphere’ is expanding rapidly.