Initial Coin Offerings offer businesses a huge range of benefits over traditional investment routes – from making floatation more cost-effective to growing a loyal fanbase. As a relatively new form of raising investment, ICOs are currently unregulated in Europe and the US. But pressure is growing on these governments to create a regulatory framework for ICOs.
Many people are wondering whether regulation would hurt or help ICOs? Let’s take a look at some of the pros and cons.
# Regulation provides assurances
All regulation is intended to make things safer for both businesses and investors by providing a legal means of resolving disputes. It also helps avoid moral hazards, where a company may take undue risks due to consequences being socialised between investors.
Regulating the ICO market means that businesses would become legally obligated to deliver on the mission and business plan they set out during the ICO. As such, there would be less incentive to change plans and take greater risks, providing assurance for investors. Having a business plan is incredibly important to make sure that finances and targets are being handled correctly for the right timeline, that is why the implementation of help like Conjoint Analysis software, and other types of software, can move this process along and give better insights into what the business needs.
Scams and fraudulent ICO campaigns would be far less frequent as investors would have a legal means of holding a business to account. In the case of hacked ICOs, investors would also be able to claim some of their money back under a regulated scheme, similar to IPOs.
These assurances are likely to attract more investors with greater capital holdings, potentially helping ICOs raise even greater funds far quicker. Businesses benefit from the working capital along with buy-in from influential investors.
# Regulation adds legitimacy to the market
Unfortunately, ICOs have been hit by a number of scams and scandals, damaging their legitimacy. The success stories still outweigh the horror stories, but one fraudulent company can severely impact the trust of investors, making ICOs seem like a risky choice dominated by dodgy practices.
Regulation would help undo some of the damage done by these fraudulent businesses, adding a stamp of legitimacy to the market. ICOs would be seen as a mature market that is worthy of serious consideration and a solid alternative investment market to traditional stock exchanges. Plus, ICOs would then be able to concentrate on things like marketing, and maybe even work with companies like Victorious to help them reach as many potential customers online as possible.
ICO can help businesses that want to focus on marketing in order to establish a reputation in the market and make customers aware of their products and brand. Building a positive reputation can help a business grow exponentially and add positive feedback. To do that, businesses even look for reputation management service providers who can effectively manage negative publicity to build a positive reputation. By implementing a reputation management strategy, the company ensures that not only their customers but also their current and future employees love them. And devoted workers are worth far more than their weight in gold. Businesses may want to prioritize acquiring the best talent possible, making marketing and a good reputation even more important. People will only join a company if they are convinced that the company treats its employees like family.
Coming back to to the importance of ICOs, any business floating an ICO would be obliged to complete Know-Your-Customer (KYC) and Anti-Money-Laundering (AML) checks, as well as report on their risk assessment and management. For experienced investors, these kinds of checks are a hallmark of a wise and considered investment, helping ICOs attract a more diverse range of high-capital investor.
# Regulation would improve transparency
Any blockchain enabled investment is supposed to be more transparent as a matter of course. After all, the ledger is public and smart contracts are mutually agreed. Yet, less tach-savvy investors can still be bamboozled by buzzwords that obscure the real business plan.
At best, investors will be discouraged from putting their money into a business. At worst, they could end up losing their investment on a bad bet that looked, on the surface, very promising.
Regulation would set clear guidelines on what must be included in an ICO and business plan, making companies more comprehensive in their ICO setup and business plans more transparent.
# Regulation adds costs
Part of the benefit of ICOs in their current form is that they are more cost-effective for small business and startups. Small businesses need to find ways that they can grow within their industry, so using resources such as this and speaking to a small business attorney can help them get this set up efficiently. Using blockchain eliminates the swathes of middlemen who earn a tidy sum for managing the legal and financial aspects of a funding round.
Instead, businesses with a great idea but little working capital can work directly with investors, creating ICO campaigns and generating smart contracts with little input from external agents, such as tax advisors and compliance teams.
Heavy regulation would invite these middlemen back into the fold to mitigate the risk of being tied up in red tape. Not only would this make it more difficult to complete an ICO, it would add huge costs for cash-strapped businesses, pricing out the smaller players.
# Regulation stifles innovation
Part of the challenge in creating a good regulatory framework is getting to grips with the technology involved. The tech is also continuously evolving, meaning any regulation implemented now could be redundant in three-to-five years.
Worse still, if the technology changes significantly after tough regulations are imposed, the technology itself may become unworkable. Say that regulation stipulated a token or coin be tied to a fiat currency, for example. If ICO technology became intimately weaved in with cryptocurrency, it may become impossible to legally run any ICOs at all!
# Asymmetric regulation would see a capital flight
Given the digital nature of ICOs, if anyone jurisdiction implements regulations that add large costs or complexity, businesses will simply run their ICOs in a different region. If, as we suspect, ICOs become a major investment route within the $118Tn global investment market, asymmetric regulation could lead to a significant flight of capital to regions with lighter regulations.
Not only will capital flee, so will innovation. Companies floating ICOs tend to be on the bleeding-edge of innovation in the digital sphere, and healthy competition between regional markets should be encouraged. If regulatory bodies are quick to listen and respond to the market, competition between regulations could help develop the ideal global framework. The alternative is that the most innovative business in the world all end up located in one region, negatively impacting societies globally.
At Tokeny, we realize the potential benefits of regulating ICOs. We want to protect investors so they feel secure in their investment, to attract a wide range of investor types, and to encourage transparency. Yet we also want ICOs to remain an affordable way of raising capital and fuelling innovation.
As such, we apply a strict vetting and certification methodology we call the Sustainable ICO Protocol (SICOP). The aim of SICOP is to provide a methodology to conduct successful, secure and sustainable token sales by standardizing good practices and ethical rules. Our team developed the protocol based on both industry best practice and a more than a decade of IPOs and consumer rights good practice.
By generating official SICOP reports for all of our client’s ICOs (here is an example with VERASITY), we reduce the investment risk without adding layers of red tape and cost, and we hope to make the ICO market more ethical, fair and transparent.
