Initial coin offering

• 1. Introduction

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  Initial coin offering is the name for a method of raising money. A project issues digital tokens and sells them, usually for cryptocurrency or ordinary currency. In September 2017, Chinese regulators discovered that token sales inside the country had already pulled in nearly 400 million dollars from about 100,000 domestic investors. They moved to shut the practice down entirely. What were investors actually buying when they handed over their money for a token that did not yet exist as a working product? How did a financing idea that started quietly in the early 2010s grow large enough to draw that kind of money? Why did it collapse under scrutiny within just a few years? The tokens themselves could mean very different things depending on the project selling them, and untangling that difference is where the story has to start.

• 2. Tokens With Many Jobs

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  A token sold in an initial coin offering can serve one of several purposes at once. It might grant its holder access to a product or service the project is still building. It might represent a participation right within a network, giving the holder a stake in how the system works. Or it might simply function as a speculative digital asset, bought and sold on cryptocurrency markets. It carries no promise beyond the hope that its price will rise. This flexibility is part of what made the model attractive. A project could raise capital by issuing tokens directly to buyers online. That reached investors anywhere in the world without going through a bank, a stock exchange, or a venture capital firm. That freedom from intermediaries let ICOs move faster than traditional fundraising. It also meant far fewer checks stood between a project and the money it collected.

• 3. Where the Money Came From

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  Mastercoin ran one of the first widely cited token sales in 2013, before most people had heard the term ICO. Ethereum followed in 2014 with a token sale that raised approximately 31,000 bitcoin, money used to fund development of its blockchain platform. Those early sales set a template that spread quickly. Blockchain projects realized they no longer needed venture capital or a public stock listing to raise funds. Between 2016 and 2017, the number of initial coin offerings expanded rapidly. Academic researchers and financial reporters tracked the surge and documented large increases in the capital being raised. Billions of dollars were invested globally through token sales during that stretch. That scale of money moving through an unregulated channel is exactly what drew the attention of financial regulators next.

• 4. Utility or Asset

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  Regulators eventually settled on two broad categories for thinking about tokens. A utility token, of the kind Bitcoin represents, may hold value for a simple reason. It lets its holder exchange it for a good or service at some point in the future. An asset-backed token may hold value instead because there is an underlying asset the holder can point to and attribute value to. In many countries it remained uncertain whether utility tokens needed regulation at all, while asset-backed tokens were more likely to be treated as requiring it. That uncertainty was compounded by how cryptocurrencies actually move. Distributed ledger technology lets anyone transfer their holdings to another person directly. No exchange has to act as intermediary, and no central record of ownership needs updating. Because those transfers cross national and jurisdictional boundaries so easily, central authorities found it difficult to control or even monitor where the money was going. Issuers, in turn, faced a genuinely complex task in working out which countries their tokens could legally be sold into.

• 5. The World Starts Writing Rules

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  By late 2017 and into 2018, financial authorities and international organizations were issuing coordinated warnings about investor protection and market integrity. Those warnings also addressed how far existing securities laws reached over token sales. Individual countries moved at different speeds. Australia's Securities and Investments Commission issued guidance in September 2017. It stated that whether an ICO was legal depended on its detailed circumstances. Hong Kong's Securities and Futures Commission said the same month that tokens could constitute securities under its Securities and Futures Ordinance. That made dealing in such tokens a regulated activity. South Korea's Financial Services Commission went further, prohibiting ICOs outright in September 2017. It promised what it called stern penalties for violations. Switzerland had previously been seen as a friendly jurisdiction for coin offerings. That same month, its Financial Market Supervisory Authority announced an investigation into an unspecified number of offerings. Gibraltar's government built a formal framework for distributed ledger technology companies in October 2017. That framework became law on the 1st of January 2018, bringing ICOs under financial controls. France's markets regulator, the Autorité des marchés financiers, was still working on rules as of October 2017. By September 2018 it had introduced a voluntary visa offering issuers certain financial guarantees. New Zealand's Financial Markets Authority released guidance in October 2017, and the Abu Dhabi Global Market issued its own guidance that same month. Canada and the Isle of Man were, at that point, still working on formal regulation. In Turkey, cryptocurrencies were legal but the business models built around them were not, which made initial coin offerings illegal as a byproduct. In Jersey, one issuer took a different path. Arc Fiduciary Ltd launched an asset-backed cryptocurrency called the Arc Reserve Currency in December 2017, built on the Ethereum blockchain. It worked directly with the Jersey Financial Services Regulator rather than around it.

• 6. China Slams the Door

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  On the 4th of September 2017, seven Chinese financial regulators jointly banned all initial coin offerings within the People's Republic of China. They demanded that proceeds from every past ICO be refunded to investors. Violators, the regulators warned, would be severely punished according to the law. The announcement triggered large sell-offs across most cryptocurrencies as markets absorbed the news. A week later, a Chinese financial official appeared on state television. He said the ban was only temporary, pending the introduction of formal ICO regulatory policy. Regulators framed the token sales they were shutting down as a form of illegal public financing rather than a legitimate capital-raising tool. China's approach settled the question by banning the practice outright. American regulators faced a different one: which tokens, under law already on the books, counted as securities at all.

• 7. The SEC Goes to Work

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  The U.S. Securities and Exchange Commission investigated The DAO and issued its report in July 2017. It concluded that certain tokens sold through ICOs could qualify as securities under existing federal law. It later added more detail through its FinHub office. In April 2019, that guidance listed more than thirty factors for determining whether a digital asset counted as a security. In practice, the SEC pursued individual cases alongside that general guidance. It charged Maksim Zaslavskiy with fraud in September 2017 over the ICOs for RECoin and DRC World. Zaslavskiy pleaded guilty in November 2018 to charges carrying up to five years in prison. In December 2017, the SEC ruled that the utility-token ICO run by Munchee Inc. counted as a security. In April 2018, the SEC charged two co-founders of Centra Tech, Inc. with running a fraudulent ICO. That ICO had raised more than 32 million dollars in 2017, drawing endorsements from celebrities including Floyd Mayweather Jr. and DJ Khaled. The SEC also ruled separately that any celebrity endorsing an ICO had to disclose how much they were paid for it. The largest settlement came in September 2019. Block.one agreed to pay a 24 million dollar penalty over its unregistered ICO of EOS.IO, a token sale that had raised 4 billion dollars. The settlement required no restitution to investors, no registration of the tokens, and no disqualifications.

• 8. After the Bubble

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  Cryptocurrency prices peaked in December 2017, and the decline that followed in 2018 pulled ICO issuance and fundraising down with it. Financial media reporting described a market in contraction, with investor demand falling well below its earlier peak. Analysts characterized the whole cycle, the rapid climb followed by the sharp fall, as a familiar pattern. It matched what is commonly associated with financial bubbles: speculative investment followed by correction. Policymakers and central banks responded by leaning harder on the financial regulation and disclosure requirements that already existed. They did not build an entirely new legal category. Some market participants adapted by building alternative structures instead, including security token offerings designed to operate within established securities frameworks from the outset. Initial coin offering activity itself declined sharply after 2018 as regulatory scrutiny increased. Token sales did not disappear, though. Similar mechanisms have continued through structured platforms run directly by cryptocurrency exchanges. It is a quieter, more supervised descendant of the model that once moved billions of dollars with barely any oversight at all.