The intoxicating, late 2017 cryptocurrency market run-up fired blockchain technology and digital currencies directly into the nucleus of the global financial ecosystem–demanding the attention of regulators, speculators and innovators. The culmination of the blockchain led to the widespread realization that virtually everything could be decentralized including the creation and funding of blockchain platforms themselves.
Thus, the year of the initial coin offering (ICO) was born, catalyzing a gold rush of ICOs that cumulatively generated more than $5.6 billion, an exponential increase over the mere $240 million raised the year prior. A loose regulatory environment paired with quixotic market sentiment led to a frenzy of token sales, spawning more than 900 individual offerings that ranged from highly successful to outright scams.
In this three-part series, CryptoSlate will assess the current state of the ICO ecosystem, analyze the regulatory shift that is making the “traditional” ICO model untenable and take a look beyond the ICO at the future of a decentralized capital generation.
The End of the ‘Wild West’
The rapid development of blockchain-based crowdfunding has resulted in a series of successful platforms such as NEO, Storj and even Ethereum; however, the speed in which ICOs propelled into the international crypto market has made it nearly impossible for regulators to create nuanced, regulatory frameworks that are able to protect investors from scammers and fraudsters.
The total lack of oversight within the ICO ecosystem has resulted in swift and furious action from regulatory bodies around the world, and with research hinting toward prolific fraud in the ICO market, countries like China and South Korea have completely banned ICOs. However, despite regulatory crackdowns and dwindling investor trust, ICOs have already generated $6.3 billion in 2018.
Statistics released by TokenData, however, reveal that 46 percent of the ICOs launched in 2017 have failed–suffering from economic asphyxiation, exit scams or condemned to development hell. With the SEC hinting toward further crackdowns on the ICO model, it’s becoming apparent that the window of opportunity in which entrepreneurs are able to generate hundreds of millions in unregulated startup capital is rapidly drawing to a close.
Exit Scams Keep Happening
Data published in July by ICO advisory firm SATIS Group also reveals high levels of fraud present in the ICO industry. In addition, the Wall Street Journal has previously reported statistics that indicate up to 20 percent of all ICOs are fraudulent in nature; however, STATIS maintains that nearly 80 percent of ICOs can be classified as “scams.”
In 2018 alone, the cryptocurrency community has been rocked by a score of ICO exit scams that have separated investors from more than half a billion dollars in invested capital. For example, the Vietnamese cryptocurrency platform Modern Tech launched an ICO called “Pincoin” that defrauded investors of nearly $660 million in April.
More recently, the ACChain project allegedly executed an exit scam, vacating offices and taking off with more than $60 million in investor capital. With investors warier than ever before, and regulators poised to take drastic action, the ICO model as it existed in 2017 is dying.
However, the future of decentralized startup capital generation is, indeed, bright. In part two of CryptoSlate’s “Beyond the ICO” series, we’ll examine the regulatory response to the ICO crisis and how regulators plan to address growing concerns regarding unregulated crowdfunding events.