What are the basic principles that underpin initial coin offerings (ICOs)?

The technology media and telecommunications (TMT) boom of the 1990s took place mainly in North America and Europe. This was mainly because these were the places where technology innovators had the greatest access to venture capital (VC) financiers and global financial markets.

Key message 1: Asia is where most of the action will be

Some 20 years later, global markets are much larger and better integrated. Technology innovators have much easier access to VC financiers, end markets and each other. The early signs are that Asia, rather than North America or Europe, will drive the rapid growth of the Crypto World.

This is because Asia is home to the largest pools of institutional and household savings. The weight of money that is available in countries such as Japan, South Korea, China, Taiwan and Singapore for trading and investment in the Crypto World is enormous. 

One sign of this is that many of the most dramatic stories concerning the boom (and partial bust) in the price of Bitcoin through late 2017 and early 2018 came from Asia. Another is the set of results that you will get from a Google search for Best Practices for ICOs. Much detailed discussion comes from corporate consultants who are based in Hong Kong and China.

In December 2017, for instance, the Fintech Association of Hong Kong (FAHK) published a review entitled ‘Best Practices for Token Sales’. The FAHK suggests that the key characteristics of crypto-coins (or tokens) are that they include bundles of rights for the holders: records of the rights and the holders are stored on blockchains.

Key message 2: crypto-coins have many uses

Crypto-coins can, of course, also be traded on crypto-exchanges. Otherwise, they vary widely from each other in terms of what they do. The FAHK notes that a crypto-coin might, among other things:

  • Operate as a digital pre-paid voucher for a software licence;
  • Provide rewards based on the activities of the holder, or on some other metric;
  • Represent loyalty points, or
  • Be backed by, or represent an interest in, certain assets.

In spite of their name, crypto-coins almost never serve as money. Bitcoin provides a facility for people to hold and transfer wealth in a semi-anonymous way, but it is not a unit of account and is only a medium of exchange to a very limited extent. It is still too early to say whether or not Bitcoin is a good store of value.

Conversely, numerous crypto-coins have at least some of the characteristics of securities that are traded on conventional stock exchanges. The key feature of a security is that it provides evidence of a claim against the issuer by the holder.

Key message 3: a good ICO is not easy to put together

The FAHK suggests that any ICO should be designed in a way that considers seven principles:

  1. LAWS. It should comply with the laws and regulations in all relevant markets.
  2. BUSINESS MODEL. There should be a strong business model to launch and sustain the crypto-coin.
  3. SECURITY. The ICO should be secure in that investors’ interests are safeguarded.
  4. TRANSPARENCY. Material risks should be disclosed.
  5. REAL SOLUTION. The ICO should provide a solution to a real need, and one that is based on sound research and development.
  6. FAIRNESS. ICOs should not be priced at levels that are based on the greed and the fear of missing out (FOMO) of possible participants.
  7. LONG-TERMISM. The ICO should be associated with an enterprise that will deliver value over a reasonable period of time.