Initial Coin Offerings (ICOs) have seen a meteoric rise in 2017; blockchain companies are increasingly turning to the cryptocurrency community and 114 successful ICOs have raised over $2 billion since the beginning of the year. For investors, ICOs can provide a greater ROI in a shorter space of time compared to traditional investments, which may see funds locked in equity for a number of years, and can see gains much quicker. In addition, the investment model is open to anyone and free from geographical constraints associated with IPOs.
However, while lots of projects are blossoming, there is still a growing concern from those who are starting to worry about the rapid growth of a deregulated market. There are also some concerns about the lack of transparency on a number of funds and their history. Additional confusion lies around the viability of business models or whether they fear the diversion of funds. These concerns all come with reason but it is essential to have a clear view of a crypto ecosystem that is as complex as it is promising.
The ICO market is to fund innovation and potentially supersede venture capital. It would be a shame to stifle the ICO phenomenon “the fastest growing form of investment” because of a mere suspicion of principle. To develop harmoniously, ICOs need regulatory safeguards to be implemented and investors need to be educated - rather than a radical ban such as those temporarily decided by China or South Korea. Also, before rushing to invest in the next Bitcoin, it is important that potential backers understand the risks that are associated with navigating the minefield of investing in an ICO.
Of course, not all ICOs are created equal. A number of poorly run operations may have had a detrimental impact to the reputation of the system. There are also risks of an unpredictable market which can be manipulated and volatile token prices. But previous successful ICOs show that a serious project can achieve its objectives it sets out and allow the financing of an ambition based on a real business model. Ahead of a future official certification, it is important to acknowledge that there is a set of control points, in terms of compliance and security, which already allow investing in confidence in an ICO project.
For any ICO, the first point to check is the profile of the company and its leaders. It is then obvious to prefer the companies who have gone through a "due diligence" process. It is also necessary to analyse the project and to evaluate its maturity in terms of objectives and the resource plan. It is also important to note that there is already a label, the ICOTruxt label. This is based on an independent rating of the start-up, monthly monitoring and an annual, financial and operational update on the project.
Issuers must then provide guarantees on the identity of the subscribers and the regularity of the payments. They must consider whether the analysis of token subscribers is integrated into the purchasing platform and what KYC / AML measures are implemented. These protective measures are simplified for smaller amounts and questions whether the subscriber appear in lists of politically exposed persons, lists of international sanctions or money laundering. These measures will be more complex for larger amounts, with verification of identity papers.
Finally, whether the ICO includes a process for the sequestration of funds must be considered. This is a key point of reassurance, and significant progress is expected to be announced shortly.
To ensure there is regularity on all these issues, an ICO should then rely on the expertise of a dedicated Compliance Manager.
Due to the nature of blockchain it can be hard to identify who is purchasing tokens, meaning that the true nature of the transaction is not clear. To ensure there is comfort in the investment, you should turn to a project that offers certain levels of transparency. Also before investing you should consider the projects Know Your Customer (KYC) measurements they have in place.
The other key factor for a secure investment in an ICO is that of IT security. A solid ICO must be based on a reliable website that has been thoroughly audited and tested, according to a bug bounty process. These same controls should apply to the deployment of the Smart Contract.
The IT team should then integrate consultants with a wide scope of IT security skills, with certifications such as: ISO 27001 Lead Auditor, ISO 27005 Risk Manager, ISO22301 Lead Implementer, ITIL, CMMI; OSCE, CISSP, Certified Ethical Hacker, RHCE, CCSE and Qualys Certified Engineer.
This critical dimension should be managed by a Chief Information Security Officer in charge of these processes, who is able to guarantee security, integrity, and availability of the information.
The role of experts
While investors are increasingly attracted by the liquidity of cyber currencies and the prospect of strong potential gains, it is clear that launching an ICO requires an extensive regulatory and technical expertise. Though some ICOs carried out directly by start-ups can offer some guarantees, it can become clear that, due to a lack of resources, the majority of projects cannot fulfil these conditions.
This is why the market needs to develop with the guidance of specialists who can support the ICO with a multidisciplinary team of experts. Similarly, on the investor side, the market is expected to mature with investment advisers that are able to decrypt the guarantees of the project and identify companies with a high potential.
The recent growth of the ICO market has meant that blockchain companies and investors are beginning to see the benefits model. In fact, it was recently reported that the money raised via ICOs has surpassed early stage VC funding. However, in order for the mechanism to become truly mainstream, education is required so startups and investors know the risks and opportunities presented by this new finance model.
Laurent Leloup, Founder, Chaineum
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