Explaining Initial Coin Offerings

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Из курса от партнера Duke University

FinTech Law and Policy

32 оценки

Duke University

FinTech Law and Policy

32 оценки

Being a successful FinTech firm requires more than just great technology; it also requires an understanding of the laws and regulations applicable to your business. This course will provide you with that understanding. You will learn about the critical legal, regulatory, and policy issues associated with cryptocurrencies, initial coin offerings, online lending, new payments and wealth management technologies, and financial account aggregators. In addition, you will learn how regulatory agencies in the U.S. are continually adjusting to the emergence of new financial technologies and how one specific agency has proposed a path for FinTech firms to become regulated banks. You will also learn the basics of how banks are regulated in the U.S. If you are unfamiliar with how these new financial technologies work, fear not. We will begin each new course section with a high-level overview of the underlying technology. While the course is principally focused on the U.S. FinTech industry, we cannot possibly cover every relevant legal and regulatory issue. Therefore, this course should not be construed as legal advice. Rather, the goal of the course is to familiarize you with the key legal and regulatory challenges FinTech firms in various sectors face, as well as the critical policy debates that are occurring in Washington D.C. and state capitals across the country.

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Cryptocurrency and Initial Coin Offerings

This module first provides an overview of cryptocurrencies and distributed ledger technology, and then examines how cryptocurrency is regulated by various state and federal agencies. You will also learn how cryptocurrency is regulated as: money, a commodity, and property. The module concludes with an examination of initial coin offerings and their regulatory treatment.

Explaining Initial Coin Offerings5:15

Regulating Initial Coin Offerings10:54

Познакомьтесь с преподавателями

Lee Reiners, CFA
Executive Director, Global Financial Markets Center
Duke University School of Law

Now that we've examined the various regulations applicable to cryptocurrencies,

I'd like to discuss a variant of cryptocurrency,

known as Initial Coin Offering or ICO,

which is the process whereby a digital token is created on

a blockchain is part of a de-centralized software protocol.

ICOs rose to prominence in 2017,

and continue to be a prominent source of

fundraising for startups that have yet to launch their product or service.

We will discuss the regulations applicable to ICOs in the next lecture.

But we first need to understand what ICOs are and how the market has evolved.

Initial Coin Offerings allow companies to raise money by creating and

selling a digital token on a blockchain in exchange for cryptocurrency,

typically Bitcoin or Ether.

Some blockchain tokens function as a digital currency.

Other tokens can represent our right to tangible assets like gold or real state.

Blockchain tokens can also be used in new protocols

and networks to create distributed applications.

These tokens are sometimes referred to as AppCoins,

utility tokens or protocol tokens.

Then there are some Initial Coin Offerings that are

intended to be nothing more than a speculative venture.

Most Initial Coin Offerings are conducted on

the Ethereum blockchain which was designed to support decentralized applications.

Why would a company issue an ICO?

Well, the biggest benefit is that it provides an economic incentive

for your network to get off the ground and overcome the classic chicken and egg problem.

In other words, it gives all users of your app or software the ability to

own a little piece of your network

incentivizing them to start using it from the beginning.

This gives the network a higher chance of success with a lot less initial capital needed.

There are essentially two types of ICOs; pre-release and post-release.

Pre-release ICOs have historically been the more common and can be conducted in VR,

digital currency or some combination of the two.

As the name implies,

pre-release ICOs occur when a project needs funds to develop a product or service.

Post-release ICOs occur when a project has launched an initial version of

their protocol and corresponding token

and wants additional funds to continuous development.

Now, let's review the steps that should be followed if a company wants to issue an ICO.

Note that I said should,

not all ICOs will follow these exact steps,

but doing so will help maximize the funds raised while also staying on

the right side of the applicable regulations

which we will discuss further in the next lecture.

Step one is to publish a detailed white paper that

describes a network you are trying to build and what it will be used for.

The white paper should provide a clear and compelling reason

for the digital token to exist,

provide a detailed technical description of

the proposed project implementation and set

clear expectations for total token supply and distribution.

Step two is to provide a detailed development roadmap

that will include estimates of time and costs

for each stage of the project and the names

of key members of the development team and their advisors.

The roadmap should allocate funding for each stage of

development and consider restricting access to funding until milestones are achieved.

Step three is to use an open public blockchain and publish all the code for your project.

This provides transparency and enables

real participation from token holders and independent developers.

Step four is to use clear,

logical, and fair pricing and the token sale.

This includes setting the maximum number of tokens to be sold in

a crowd sale and using a pricing mechanism which is not increase over time.

Step five is to determine the percentage of tokens to be set aside for

the development team to reward them for the work they put into the project.

The final step or warning if you

will is to refrain from marketing the token as an investment.

Tokens promoted as investments most likely

qualify as securities subject to SEC registration.

We'll talk more about this in the next lecture.

But for now, just know that most token issuers do not want to register with the SEC.

Prior to 2017 Initial Coin Offerings were essentially unheard of.

As we can see in this chart at the beginning of 2017,

there had been $300 million raised all time through ICOs.

By the end of 2017,

$5.86 billion have been raised through ICOs.

In December 2017 alone $1.4 billion was raised through ICOs.

This remarkable growth on ICOs is hard to explain.

Certainly, the massive increase in the value of

cryptocurrencies that occurred in 2017 played

a big role as a greater familiarity with and adoption of blockchain technology.

However just like with cryptocurrencies,

human psychology has played a major role.

Many people have been buying ICOs simply because they think they can sell it for

a higher price later and could care less about the tokens underlying utility.

Thus, it is possible the ICO market could be in the midst of a speculative bubble and if

the SEC were to dip all ICOs to be Securities subject to SEC registration,

the bubble would quickly burst.

But as we will talk about in the next lecture,

thus far the SEC has taken a more measured approach to regulating ICOs.

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