Initial coin offering regulation is no longer in the news the way it was at the height of the ICO hype as seen last year and most of 2018.
This relative quietness may give the casual observer the impression that things are saner in the industry. Nevertheless, close observation has shown that scam ICOs and meaningless projects are still very commonplace in the industry.
The situation was so bad that at point, the Ethereum co-founder Vitalik Buterin said that unless the industry got its acts together that he was going to quit.
Buterin was just echoing the frustration many in the industry have faced in the face of players who see the cryptosphere as another opportunity to make money at all cost.
Prevalence of Scam ICOs
The ICO advisory, Satis Group in a report in July gave a scary verdict on ICO. According to firm,
“over 70 percent of ICO funding (by $ volume) to-date went to higher quality projects, although over 80 percent of projects (by # share) were identified as scams.”
The present situation in the industry is that all through, scam ICOs have continued to launch their projects taking advantage of the decentralization concept and the pseudonymity of digital currencies.
No Decisive Regulatory Actions By Most Countries
Despite this trend, regulators seem at loss on how to tackle these except mostly rhetoric on why investors should avoid crypto-based investments.
Some countries such as China, India, Pakistan and South Korea went a step further to ban initial coin offerings in their domains in what many described as throwing away the baby with the bath water.
RBI Moved Against Crypto Exchanges
India was able to limit the use of digital currencies in the country when the Reserve Bank of India moved against crypto exchanges in the country by mandating banks to suspend all banking services to crypto-affiliated exchanges.
In a July statement, RBI wrote:
“Virtual Currencies (VCs), also variously referred to as cryptocurrencies and crypto assets, raise concerns of consumer protection, market integrity and money laundering, among others… In view of the associated risks, it has been decided that, with immediate effect, entities regulated by RBI shall not deal with or provide services to any individual or business entities dealing with or settling VCs,”
Local stakeholders tried to stop the new central bank from being implemented but have generally been unsuccessful.
A Lack of Understanding of the Crypto Industry
It became obvious that the reason the Indian central bank moved against cryptocurrency exchanges was largely due to dearth in understanding regarding the industry after the agency admitted that it conducted no study to understand digital currencies.The primary reason regulators are undecided on how to tackle ICOs and other irregularities seen in the crypto industry is that it is an uncharted territory. Click To Tweet
Most times, statements made by regulators are pointers to this fact. No wonder the Securities and Exchange Board of India (SEBI) revealed in its annual report 2017-18 that it sent some officials to three countries to study how the regulators there deal with cryptocurrencies.
Some Countries Made Significant Progress in Crypto & ICO Regulation
The agency understudied the approach adopted by regulators in UK, Japan and Switzerland in creating amity between their local crypto industry and the government while ensuring that relevant laws are complied with by the industry.
Other countries such as Malta and Thailand have also developed regulatory frameworks that enable acceptable industry operation in their respective countries.
In spite of this progress, no agency has come up with a guideline with which scams would be checked and investors adequately protected.
SEC Mainly Against Sale of Securities And Bogus Claims
The Security and Exchange Commission sometime in May launched a spoof website to educate investors that scams are a prevalent feature of the cryptocurrency industry.
“The rapid growth of the ICO market, and its widespread promotion as a new investment opportunity, has provided fertile ground for bad actors to take advantage of our Main Street investors,”
said SEC Chairman Jay Clayton.
“We embrace new technologies, but we also want investors to see what fraud looks like, so we built this educational site with many of the classic warning signs of fraud.”
Way Too Much Fraud in Crypto Space
Compounding the problem is a huge ‘industry’ of scammers who have taken advantage of the lack of regulatory activities to join the fray, defrauding investors.
There have been instances in which millions of dollars have been raised in crowdsale and the developers disappearing with the funds.
This has in no small way brought the need for regulation to the fore as governments make frantic efforts to protect investors. This seems to have been a race to balance the need for the safety of investor fund and that of protecting the digital currency industry.
No Central Jurisdiction
It has become obvious to all that regulation of the crypto industry is not achievable by a single agency. A decentralized economy is intrinsically built not to be subject to a single jurisdiction.
This is why what scammers need is just some fake IDs and a fancy website with crypto wallet addresses to steal money from investors. One feature of initial coin offering regulation is balancing the quest to encourage innovation and the desire to protect investors.
Most governments would not want to lose out in a developing technology that everyone admits is disruptive even as they would have wanted to debar every scammer from stealing from people. It a race between regulators, scammers and an industry trying to discover its rhythm.
Regulation Can Be Internally Formulated and Enforced
There have been propositions that the crypto community creates its own internal checks to regulate the way things are done in the industry, but even this has not gained traction as ICOs have continued to be all-comers affair.
Meanwhile, conmen and other scammers have continued to leverage on the melee. There are many regulators that would have preferred blanket ban on ICOs but what has become clear is that with effort, the ecosystem can be sanitized as exemplified with the Japanese experience.
The country has become one of the most crypto-friendly today. Even though its regulators initially wanted to have cryptocurrencies banned as China its neighbor did.
It has become obvious that the regulators are mostly taking a wait-and-see-how-it-turns-out approach since they mostly have limited understanding of how the ecosystem works.
The SEC for instance has always made its stance clear that it would not tolerate selling securities as tokens. A lawyer informed about the commission’s activities hinted that they are getting ready to roll out a set of rules to govern ICOs.These rule finally was all about prohibited sale of tokens.
Views such as the one expressed by insiders among regulators point to the suspicion that ICO would continue to be all-comers affair in the forseeable future as government agencies continue to focus frenetically on local jurisdiction.
How About Utility Before ICO?
To sanitize the ecosystem, teams planning ICOs should not just focus on raising funds. Rather, they should readjust to create utility for their tokens to establish them as resources backed by value.
This can be done by developing alpha prototype of whatever concept it is they are proposing. This would ensure that those entities such as scammers are barred from raising funds through ICOs.
Although this policy will affect genuine startups it may just be the path that liberates the industry from scammers.
Without a strong policy such as this, the digital currency community will not be able to reify the abstractness most ICOs have become. This is why we are recommending this system of growing digital assets for investors.