Initial Coin Offering (ICO) is an innovative tool for raising capital in an organization mostly for new startup companies. ICO as a fundraising model is emerging as new model compared to the traditional venture capital model. In an ICO, the issuing startup companies offers investors digital crypto-tokens in exchange for established cryptocurrencies such as Bitcoin (BTC) or Ether (ETH) or some traditional currency like euro or dollar.
ICOs are mostly used to fund the development of new digital platforms or other related projects based on public blockchain or distributed ledger technology. Furthermore, ICOs are used to gain a most number of users to the ecosystem under creation. According to the global body of professional accountant organisation ACCA in 2018 mention that what makes ICOs a desirable tool for new startup to raise funding is their simplicity and speed (ACCA, 2018).
Then the question arises what it means to an investor compared to traditional venture capital model where it is complicated in nature attached with huge risk factor. Here ICO investors with its simplicity and speed are drawn to the unprecedentedly high potential profits in early stage of funding. Similarly to crowdfunding, ICOs share the same underlying principles where financing is collected as micropayments in the form of an open call directly to general public utilizing digital means of communication. Thus ICOs can be considered as an alternative form of crowdfunding ( The Economist, 2017a,b). Here initial coins are sold as tokens in exchange for other cryptocurrencies like Bitcoin.
Swiss Financial Market Supervisory Authority (FINMA) describes various types of tokens in their guidelines on ICO regulation (2018)
- Payment tokens like Cryptocurrencies, like BTC used as a means of payment for acquiring goods or services or as means of money or value transfer.
- Utility tokens access digitally to an application or service utilizing a blockchain-based infrastructure.
- Asset tokens representing assets such as debt or equity on the issuer. It can be used to hold votes on crucial business decisions or technical changes to the platform.
These 3 types of token give a comprehensive view of token system for potential investors who are new to Crypto Tokens.
Image: John Towner@heytowner
The Economist 2017 a,b