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The crazy world of crypto currencies and ICOs

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I'm boarding a flight yesterday and murfing (mobile surfing).  Flicking between Facebook apps, twitter, bank account, BBC news and more.  Suddenly I spot a new ICO - Initial Coin Offering - for a new bank.  From Wikipedia:

"An initial coin offering (ICO) is a means of crowdfunding the release of a new cryptocurrency. Generally, tokens for the new cryptocurrency are sold to raise money for technical development before the cryptocurrency is released. Unlike an initial public offering (IPO), acquisition of the tokens does not grant ownership in the company developing the new cryptocurrency. And unlike an IPO, there is little or no government regulation of an ICO.

"The first ICO was for Mastercoin in 2013. Ethereum raised money with an ICO in 2014.   ICOs are now extremely popular. As of May 2017 there were currently around 20 offerings a month, and a new web browser Brave's ICO generated about $35 million in under 30 seconds. There are at least 18 websites that track ICOs."

So I see this ICO for a new bank ... sounds interesting.  The new bank will be using all the hottest and latest tech and offers me a guaranteed 50% uplift on my investment at launch.  Wow.  I want in.

I'm busy moving into Kraken to transfer 100 ETH (Ethereum's cryptocurency) to seal the deal when, just as I'm about to hit the send button, I stop and pause.

This whole thing started as I saw an ad on Facebook for a new bank ICO.  I don't know anything more than that about this bank. My greed had kicked in, thinking that I'd get 150 ETH back by just transferring 100 over to them today.  50 ETH are worth around $16,000 depending on what day of the week we're making that valuation, so it's a healthily profit to be made in a couple of weeks.  But wait a minute.   I don't anything about these guys.

Who is behind this bank?  What credibility do they have?  Will I really get my money back as, once it's gone ... it's gone.

There's a real madness in the crypto community today, with a wave of ICOs pushing BTC (bitcoin) and ETH prices upwards.  Someone at some point is going to say: stop the world, I want to get off and the whole thing will come crashing down.  In fact, that crash started last week with BTC and ETH losing 25% of their value in just a week.

Equally, many ICO offerings are scams.  Not all - for example, Bancor is one I am personally vested in - but Monaco ICO was one in question.  In fact, there are so many out there that it has become a meme on Quora:

Are ICO tokens a scam?

1 ANSWER from Terrence Yang, Ex-Wall St. lawyer.

Most ICOs are scams and most cryptocurrencies (other than Bitcoin, “altcoins”) are shit coins.  Some ICO tokens are not a scam.

Tim Draper is one of the sharpest VCs in the entire cryptocurrency space. He bought the entire second auction of Bitcoins offered by the US Marshals as part of the Silk Road asset seizure. Tim is participating in the ICO of Tezos. This is merely social proof — do your own diligence.  However, it is a sign that at least one savvy VC does not consider all ICOs a scam.

Some investors may be more book smart than Tim but what matters in investing is returns and risk.  You can’t just guess right. You have to make bets.  Tim took a lot of risk but because he “pulled the trigger”.  Since then, Bitcoin prices have skyrocketed. Tim’s mark to market returns are probably fantastic (I don’t know if or when he sold his Bitcoin.)

With ICOs adding to the confusion of what is already a confusing market of crypto and digital currencies - BTC, ETH, XRP and more - the rule here has to be caveat emptor, buyer beware, and for a more detailed look, here's a great article from Reuters by Henry Engler:

"Initial coin offerings" present dangers to investors, new challenge for U.S. regulators

NEW YORK (Thomson Reuters Regulatory Intelligence) - The explosive growth of "initial coin offerings," a capital-raising tool that uses bitcoin and other crypto-currencies to fund projects that leverage technologies such as blockchain, has sparked concern among experts who warn that the lack of transparency around the issuance of such coins is a concern for both investors and regulators.

The Securities and Exchange Commission is said to be taking a hard look at the increased use of such offerings, with the growth of so-called ICOs surging in recent months. The overall value of the coin market is estimated at over $90 billion, and the frenzied activity has fueled a record-breaking rise in the price of bitcoin, which hit an all-time high of $2,911.86 this week, according to the CoinDesk Bitcoin Price Index (BPI)[here].

ICOs have become mired in an ongoing industry debate, with critics likening the phenomenon to the dotcom bubble in the 1990s, while proponents say the use of such coins and offerings facilitates the type of innovation that could radically transform existing business processes and industries.


A simplistic interpretation of the issuance of such coins, or tokens, is that they are an investment on a possible future payoff. For example, if a startup technology firm has a business plan to apply blockchain for a certain solution, say, improve the back-end of securities or payment processing, or enhance record keeping in the insurance sector, investors would purchase the tokens before such a solution is actually realized or operational. The ventures could receive the tokens for payment in future development of their business.

The tokens do not in themselves confer ownership of a stake in the business. Depending on how the deal is structured, the investment in the tokens might lead to a future share in revenues of the venture. In other cases, the investment can be compared to fund-raising or a crowd-funding vehicle, using tokens that could be redeemed for cash at a later date once the venture is successful. Since the issuance of such tokens is currently outside the scope of regulatory oversight, they are seen as a quick way in which tech startups can raise capital without all of the necessary requirements that would come with, say, an initial public offering in stocks.

But what seems to be fueling a lot of the recent flows into such tokens is their speculative potential, and the ability to take the tokens and exchange them for cash on many of the world’s crypto-currency exchanges. If the coin is listed on an exchange after its initial offering, then the likelihood that its value increases grows considerably, say some observers.

However, not all ICOs are created equally. Due to the complexity of the underlying projects, experts argue that investors need to have the technical expertise to be able to evaluate whether investing in an ICO makes sense. Moreover, the startup itself should provide sufficient information for investors to evaluate the investment. In some cases, the information is inadequate.

“Lots of good things have come out of the relative flexibility of ICOs and to raise capital efficiently from a community that understands the process,” Ajit Tripathi, director of fintech and digital banking at PwC, recently told Regulatory Intelligence.

“Overall, it’s a very interesting model in raising capital, but the relative lack of transparency is a concern,” he added. “Some tokens have no disclosure or underlying prospectus….the overall lack of transparency is the main issue.”


From a regulatory and legal perspective what remains contentious is whether the issuance of such coins are the equivalent to the creation of a new security, and should therefore come under the oversight and regulation of the SEC.

Peter Van Valkenburgh, director of research at crypto-currency advocacy group Coin Center, told a recent New York conference that what participants in the market want to avoid is the creation of a token that acts as a security.

"It's like painting a target on yourself. Because, what does an organization like the SEC regulate? They regulate IPOs,” Van Valkenburgh told a panel on the legality of ICOs.

“That's what they regulate. So, let's just change one letter and make it a 'C' and then it's OK, right? No. Why would you adopt the terminology of the regulator when you’re building a thing you hope they don't regulate?" he asked.

The SEC’s view on the issuance of such tokens is less than clear given the lack of public comment to date. But industry experts say they are aware that the issue is being actively explored.

“I know that this is something that’s high on their radar,” said a U.S. regulator who requested anonymity.

What might be a guide to the SEC’s thinking is its recent decision to block the listing of the first U.S. exchange-traded fund tracking bitcoin. A more-than-three-year effort by investors Cameron and Tyler Winklevoss to convince the SEC to allow it to bring the Bitcoin ETF to market stalled when the agency's staff ruled against them in March. The agency has since said it will review its prior decision (here).

Tripathi of PwC says the SEC decision shows the agency recognizes the benefits of the ICO marketplace, but is also concerned by the lack of oversight and transparency from the exchanges on which the coins are traded.

“These exchanges where tokens are traded are not exactly transparent or have the right regulatory structure or supervision,” said Tripathi. “It’s very easy for participants to manipulate prices…which the SEC highlighted in its opinion on Winklevoss.”

Specifically, the commission said it did not find the proposal to be consistent with the Securities Exchange Act, which requires “among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest.”

In order to address the agency’s concerns, two things [here] were needed.

“First, the exchange must have surveillance-sharing agreements with significant markets for trading the underlying commodity or derivatives on that commodity. And second, those markets must be regulated,” the commission said.

Whether the ICO sector, populated with numerous companies, small and large, who see their unfettered status as innovators a large part of their mission and appeal, can organize themselves to meet such requirements is very much in question at the moment.

Chris Skinner Author Avatar

Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog,, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...

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