🇬🇧ICO (1): What This Is and How It Works

ICO, What’s ICO?
ICO? What’s ICO?

Archive, September 13, 2017, what’s ICO?

An ICO (Initial Coin Offering) is the cryptoeconomy transposition concept of IPO (Initial Public Offering) in the economy and in real finance ; ‘real’ means what differentiates the cryptoeconomy with respect to the economic and financial system, commonly understood, i.e. the presence in the latter of institutional entities (i.e., subnational government) preposed to its (theoretical) correct, functioning, control and addressing.

By an IPO, a company that intends to be listed on regulated markets in order to collect liquidity, can do so in two ways as well as competitors: means of an increase in capital, in which case new shares will be issued in the market in exchange for liquidity (capital and liquidity collection), or through the provision of shares on the market already owned by shareholders (liquidity collection only).

The IPO can also be launched by companies that are already listed, and not only by those who are approaching the market for the first time, but it also involves direct and indirect intermediation costs. The costs of direct intermediation, in this case those most affected, are imposed by the regulators through the provision of costly and mandatory procedures for the company: the cost is the price of the work of intermediaries provided for by the procedures.

Staying from the point of view of the real economy if a company seeks liquidity for its development strategy, and does not want to go to the stock market, one of the options is crowdfunding : those who want to support the idea directly enter cash into the company and receive rights from the company in return. The relationship between supply and demand takes place through specialised network-acting platforms, which are regulated, subject to institutional control and, of course, have a cost with structure differently allocated to both actors. The advantage for the investor is the guarantee given by investing through specialised intermediaries while, for the company, the plus is to be able to come into contact with a large number of potential investors (even minimal investors) at a relatively low cost.

The rights subject of trade are of a different nature : from equity (shares or rights to them) and structures with bond features (remuneration on the loan also convertible), to account on the services/products that will be developed.

It is natural that for a start-up, so in general an idea of business as a business in embryo and with large liquidity needs for entrepreneurial development, the IPO is not feasible, as this solution is aimed at well-established presences in the market that decide strategically for the listing. On the other hand, crowdfunding is an optimum both for the collection and for those who decide to invest, even modest sums, in new ideas with high potential for development and high risk of failure.

The ICO, on the one hand, is a mirror from the point of view of the mechanism, the logic of operation, to both IPO and crowdfunding: rights are offered by a company to the public in exchange for money with the strategic objective of collecting liquidity. The similarities stop here.

The company that through an ICO intends to drain money issues a ‘token’, the virtual representation of a right on it. The token on the basis of the public declaration of intents (white papers), which the company itself makes known, will give those who purchase it the right to obtain a return in the future.

The investor buys, commonly through the most liquid cryptocurrencies (Bitcoin and Etherum), the token, the right from the company : if the project develops, he will exercise its right and obtain the counterpart, if it fails, he will lose the money.

The scheme expects the token to be issued by leaning to a blockchain (usually Etherum or Waves) by a smart contract so that it has the certainty and transparency of the issue and the terms of the contract.

Thus, in addition to the also underlined logical relevance, with the ICO there is a complete transposition of consolidated funding operations into the world of the crypto-economy world.

As fin-tech innovation ICO is remarkable: it eliminates any kind of intermediary in the collection, completely deleting the costs due from one party to the actors imposed on the IPO and on the other by the costs and constraints of crowdfunding platforms; in comparison with the latter, it can rely on the same widespread advertising of the market approach. In its evolved form it can offer significant guarantees about the destination of the investment, as well as the intermediaries currently in the real economy doing business in this regard.

The problem, for now, is that ICOs do not present themselves in the evolving form and lend themselves to actions of a nature that are fraudsters: we’ll examine soon the reasons, dangers, countermeasures and solutions to address this new rapidly expanding market, minimizing the risk. Operational structures of ICOs can be found here and here.

This post was originally published on September 13, 2017, in Italian version on www.thescanner.info .This is adaptation of a neuronal Italian/English AI translation by IBM Watson.