Lo and behold the Initial Coin Offering (ICO), a method involving crowdfunding to raise capital for start-ups or projects is still in their nascence. As of late, ICOs have been bombarding news headlines as well as generating a huge buzz among the Blockchain and FinTech community, and for a good reason too.

Since the first ICO in 2013 held by Master Coin, ICOs have come a long way in a really short period of time. Quoting figures from, a website that collects data about ICOs, 872 ICOs took place in 2017 which raised capital totalling 6.1 billion USD as compared to only 90 million USD raised in 2016 from 29 ICOs. In the first half of 2018 itself, ICOs have already managed to raise 5.7 billion USD, approximately 93% of the total capital raised in 2017!! Furthermore, there are many examples of ICOs raising capital at an astonishing rate, such as the ICO for a new web browser called Brave which generated about $35 million in under 30 seconds in May 2017.

However, more often than not, ICOs have been described as scams or bubbles that are bound to pop. According to Tokendata, a comprehensive ICO tracker, 46% of projects funded by ICOs in 2017 have failed by February 2018. The failing of these ICOs caused many to fall victim to  less than sound investments (due to its nature which we will discuss later), triggering the need for regulatory bodies such as the SEC to step in to unveil scams and schemes to protect the average investor.

Looking at the two extreme sides of the coin, where each side paints an entirely different picture, the extreme good and the extreme evil, a basic understanding of ICOs are crucial to allow you to formulate your personal stand on the issue.

Breaking down ICOs

With the general idea in place, let us now look at the characteristics of an ICO that sets it apart from traditional capital gathering methods:

Put simply, an Initial Coin Offering is merely a fancy name for the sale of new cryptographic currencies (commonly known as tokens or coins) in exchange for distinguished cryptocurrencies such as Bitcoin or Ether. Shockingly simple? Yes.

The proceeds from the sale will then be used to kick-start and develop technology for the platform or idea that was projected to token buyers. In a way, through the sale of cryptographic tokens, capital can be raised for future projects similar to how capital is injected traditionally through issuing shares like IPOs.

a) Stage of Investment

ICOs are generally used for start-ups or entirely new projects. Hence, through an ICO you are essentially funding an idea or concept at its earliest stage, with no actual product or concrete past performances to date. This opens up new doors for Blockchain-related start-ups to amass the funds needed to kick start their project hassle-free and cost-efficient although the very open door leaves the average investor much more vulnerable to scams and unsound investments.

b) White Paper

In the ICO process, you don’t actually have to have an actual product on hand, you just require an interesting idea, justifying how it’ll work and most importantly generate enough market hype. This is where the white paper comes in. The white paper basically lays out all the information its potential buyer needs to know in order to purchase the token.

Inside the white paper, information such as the business model, vision of the project, the team responsible for execution, the use of funds and the usage of tokens may or may not be recorded. Do take note that due to lack of a regulatory framework, any kind of information can be posted up on the white paper of an ICO regardless of its relevance or authenticity. (Although there may be repercussions on misleading information imposed by authorities like the in the near future).

In short, the white paper is like an ad for the ICO in order to allow customers to be able to evaluate the ICO on some basis.

c) Utility

One very unique trait that an ICO possesses would be the usage of the tokens itself. Tokens issued by ICOs can be categorized into three types: Currency token, Equity token and Utility token.

A currency token reflects the token in the form of another currency, be it cryptocurrency (E.g.: Bitcoin) or otherwise (E.g.: USD), meaning it can be seen as just another type of currency. A security token on the other hand is not too much different from your traditional securities in the traditional market. It constitutes an investment that may potentially give rights to dividends, voting rights as well as possible caputal appreciation gains. Lastly, a utility token is a token that can be exchanged for services on the platform, after the platform has been completed. Services can vary from platform to platform, ranging from providing computation power to using the tokens as loyalty points in the future.

More often than not, a token would be a hybrid of different types of token, meaning it can serve as a currency token but also functions as a utility token at the same time, blurring the line defining cryptocurrencies even further.

d) Risk profile

Blockchain related investments are generally subjected to high levels of scepticism as these sort of investments are assumed to be highly risky. In this context of discussion, the ICO is no different. There are two aspects which have been constantly contributing to the high riskiness of ICO, which are as follows:- 1. Regulation & Legality and, 2. Information disclosed. The lack  of regulation, the absence of legal clarity and the relevance or quality of information disclosed on white paper have respectively lead to systematic risk and information asymmetric risk.

The crowdfunding of the start-ups through ICOs have been progressively democratizing. In other words, most of the start-ups gain capital from the investors publicly and globally without having to go through the regulators’ checks (for now). Hence resulting in the exponential upward trend of the number of individual ICO investors. Investing in ICOs varies from the conventional Initial Purchase Offering (IPO), as it only targets certain market’s investors upon approval granted by the authorities. The legality and the regulation for ICOs have yet to be addressed or spelled out clearly. However, the adoption of proper regulation and legal framework for cryptocurrencies ranges and varies from country to country. For instance, China and Korea do not recognize ICO and declared it as an illegal security, while, the United States welcomes ICO given certain conditions are met.  Therefore, if anything goes wrong in the ICO market, the ICO market will be exposed to greater investment loss as its systematic risk is higher than the regulated market.

“Risk comes from not knowing what you’re doing,” as quoted from the experienced financial market player, Warren Buffett, who stressed the importance of relevant information needed to make a rational financial decision. Information presented on a piece of white paper plays a role in the potential investment evaluation for investors. The level of information disclosure required and the quality of information needed is not standardised for ICOs. According to Zetzsche, Bukley, Arner and Föhr (2018), approximately 17.96% of their sample white papers provide merely technical information of the product or process to be developed; 31.04% of them did not disclose initiators or bankers information; 23.28% of the white papers do not show any financial circumstances of the projects; and, 85.8% of the start-ups remained silent on the arrangement of funds. The information shown on the white paper is believed to be the only information source for potential investors to count on to make a financial decision.

In general, the risk appetite of the investors who prefer to invest in start-up businesses are larger. As the saying goes, the higher the risk taken, the higher the returns gained. If the start-up project is a success, the investors could earn an attractive sum of return, or end up owning a worthless piece of coin in the end.

Thoughts about ICOs

ICO is an innovative financial product created to ease the capital accessibility. We should keep our emotions in check and uphold this financial product, as how many did to praise other creative financial innovation products, such as credit default swap and mortgage-backed securities created one decade ago before the last global financial crisis (also known as the Subprime crisis) in 2008. Bear in mind that if there was one key takeaway from the Subprime crisis, it is the importance of having a regulated financial environment.  In this article, the white paper is the key document that should be scrutinized by the authorities to avoid frauds and to boost the public confidence. The financial market can’t afford to repeat the same mistake again as the systematic risk this time rooted in ICO is fairly higher than one decade ago. Recently, the Securities and Exchange Commission (SEC) of Thailand has taken the initiative to regulate the ICO environment by formalising the process of ICO and specifying seven cryptocurrencies to be paired in the process of ICO transactions. The aforementioned regulator is expected to bring in more revenue to the government as tax regime applies to ICOs participants and start-ups.

If every leading global market follows suit by having a set of uniform rules and regulations for ICOs, a new era of well-orientated and widely adopted digital economy might just be born. However, whether or not the ICOs and other Blockchain-related products will leave an impact that will shake the world, only time will tell.

[tw-toggle title=”References”]

  1. The Edge Markets (2018). Thailand takes lead in crypto, 2018. [Online] Available at: [Accessed June 2018]
  2. com News (2018). 46-last-years-icos-failed-already. [Online] Available at: [Accessed June 2018]
  3. io (2018). Funds raised in 2017 & 2018. [Online] Available at: [Accessed June 2018] [Accessed June 2018]
  4. Forbes (2018). How To Assess An Initial Coin Offering. [Online] Available at: [Accessed June 2018]
  5. Zetzsche, Dirk A. and Buckley, Ross P. and Arner, Douglas W. and Föhr, Linus, University of Luxembourg Law Working Paper No. 11/2017; UNSW Law Research Paper No. 17-83; University of Hong Kong Faculty of Law Research Paper No. 2017/035; European Banking Institute Working Paper Series 18/2018. The ICO Gold Rush: It’s a Scam, It’s a Bubble, It’s a Super Challenge for Regulators (February 15, 2018). Available at: [Accessed June 2018]
  6. The Edge Markets (2018). What you need to know about initial coin offerings. [Online] Available at: [Accessed June 2018]
  7. Cointelegraph (2018). Don’t Believe the Hype. Five Largest ICO “Exit Scams”: Expert Take. [Online] Available at: [Accessed June 2018]



Prepared by:

Researchers – Koh Su Yen, Vincent Lye Ming Han

Editors – Mohamad Syafiq Aiman, Saras Rehathi, Lim Shu Ni

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