ICO (Initial Coin Offering) and tokens: new frontiers of the cryptocurrencies

published on May 15, 2018

ICO is the acronym that was created by the web users operating in the world of the cryptocurrencies due to the similarity with the acronym of I.P.O. (initial public offering), taking advantage from the worldwide diffusion of a word that is very familiar for all the financial institutions used to describe the initial public offers within the capital markets of financial contracts.



Theoretically speaking, it represents the nowadays largely used acronym formed by the initials of three words: “initial coin offering”, where “coin” substitutes the word “public”. From the very beginning it is clear that the genesis of the acronym, the world “coin” (that constitutes the content of the initial public offering) is oddly replacing the word “public” (that – conversely -constitutes one of the features of the diffusion of the initial offer, to be referred to an indistinct public, that remains and is immanent also in the ICO concept). 

So, to be precise, the object of IPOs, i.e. the “coin”, in an acronym, would be better placed to specify the object of the “initial public offering”, and according to the English grammar they would have to be prefixed to the IPO as the qualifications of its content: therefore, applying the logic, perhaps the most correct name for the ICO would have been rather CIPO or IPCO.
Hence, avoiding the fact that, from the middle of 2017, web operators are increasingly speaking of “tokens” rather than “coins”, as per the fact that technically the content of the ICOs usually are not proper cryptocurrencies. This approach seems to furtherly rely on the fact that the web – and its anarchist- attitude -  seeks to avoid the attempt of national legislators to regulate ICOs using existing monetary and financial legislations, through the idea that the content of initial public offerings has not necessarily a financial nature.
Therefore, in order for the national legislator not to fall in basic misunderstanding, the ICO issuers have tried not to speak of an initial public offering of money (coins) or financial contract, while talking about objects (tokens); hence, the web would no longer apply the “securities” regulation but the “commodities” one.
Anyway, the market has not yet converted the ICO term in ITO in a widespread mean (even though some authorities have detected the problem: see the Staff Notice 46-307 of the Canadian Securities Administrators dated August 24, 2017, which for the first time qualify the ITO term to ICO).
It might only be a matter of time, but in semiology the chance of a word to be widespread is mostly measured by its diffusion and by its ability to represent objects or concepts of common understanding. As for today, the word ICO is largely diffused, and there is no doubt that there is an universal understanding of the ICO phenomenon within the internet users.

ICO: a definition – the market

However, a common definition of ICO is not easy to be found, since the phenomenon described by the acronym can be considered at least from two main points of view: the point of view of those who would like to exploit the functionality and which are naturally refractory to categorizations (mainly the issuers and service companies created as facilitators for third parties’ ICOs), which is the collection of capital on the markets, and the point of view of regulatory Authorities (as for today, mainly the national regulators) that would feel the need to define the phenomenon to contain it within a known and regulated category or in any category sufficiently clear to be subject to a specific regulation in the future.
So websites which provide services to individuals wishing to launch an ICO place the emphasis on functional elements of such definition, with a view of promoting its use for the most diverse purposes.


Bitcoinmagazine.com define them as “a fund-raising mechanism in which new projects sell the relevant encrypted tokens in exchange for bitcoins and ether. Something similar to IPOs where investors buy shares in a company.”
According to Cointelegraph.com ICO are: “an event, sometimes referred to as “crowdsale” (massive sale) where a company issues its cryptocurrency with the purpose of raising funds. Usually a certain number of encrypted tokens are issued and are placed on the chosen audience, more commonly in exchange for bitcoins but also real currency.”
Then, Coinschedule.com: “the act of raising funds by selling encrypted tokens (also known as coins) as related to a project based on the blockchain. Funds are typically collected in cryptocurrencies, in the form of bitcoins, ether and others.”

Technical definitions

Beyond these definitions - which may be defined as an advertise - given by the websites that support ICOs, also the definitions provided by the experienced users are quite diverse. It may be useful to remember two of them: a definition published on November 30, 2017 by Usman W. Chohan, MBA at the School of Business and Economics, University of New South Wales, Canberra, Australia who defined it as “a mechanism to raise capital by issuing bitcoins to investors as a percentage of a totally new currency in exchange for capital that could become a legal currency or another cryptocurrency. ICOs sell cryptocurrencies or may sell property rights or royalties on a project, as opposed to IPOs selling a stake in the same issuing company.”
A latter definition is found at the beginning of an intervention by the lawyer Massimiliano Nicotra in Blockchain4innovation.it: “ICOs are a form of financing, used by startups or by subjects who intend to develop a specific project, made possible through technology. In a nutshell, in order to obtain funding, a project will be proposed to the public (usually through a so-called “whitepaper”) through the blockchain technology with the creation of “tokens” to be sold, against a fee, to lenders.”
Finally, I would like to mention of ICOs provided by Investopedia.com, which seems to borrow the definition given by an American lawyer in an interview, that thank to its shortness and accuracy has become one of the most widespread on websites dealing with the topic: “An unregulated system through which funds are collected for a new entrepreneurial initiative linked to cryptocurrencies.”  
To sum it up, there are key elements that are shared by all the above-mentioned ICO definitions: 
  • they are processes (defined as event, mechanism, system) which is aimed to fund raising
  • target the general public (although there are cases of specific consumer targeting)
  • Processed through the blockchain technology (thus, relying on existing cryptocurrencies for fund-raising and the so-called token - legal objects that stand to cryptocurrencies as a commodity is to a security
  • as discoursed within the following paragraph - as a counterpart of the funds raised)
Additionally, a further characteristic may also be mentioned (as long as it lasts...):
  •  unregulated
Originally, ICOs were born to support start-up initiatives or business projects in their initial stage, therefore hardly financeable through traditional channels. However, it is no longer considered necessary to link the ICOs phenomenon to a start-up initiative; being a fact that ICOs have been created and have been developed to spread within the start- ups environments, it is also a fact that they are accessible to any business activity, even a traditional one within an established market.

ICO and token

A key element, although being an significant variable in a ICO, is what the investors obtain in exchange for the initial purchase: according to the best scholars’ papers available in the web, an investor obtains a “token”.
A token - according to the Oxford Dictionary of the English language - is: an object whose purpose is the visual or material representation of a fact, a quality, a sensation, etc. (“A thing serving as a visible or tangible representation of a fact, quality, feeling, etc.”);
It has been mentioned above how the token is the instrument created by the network in order to separate the ICOs from the regulation for the issuing and placement of financial products, arguing that not necessarily the counterpart of the funds raised through an ICO shall have the nature of a financial contract: its purpose may be the issue of the token to be used to purchase, in a limited environment, specific goods and services offered by the issuer.
As for today - within the world of ICOs - a token is opposed to a coin, and preferred by issuers who do not intend to define immediately within the traditional financial categories (share, share, bond, asset, right, etc.) the compensation offered in change of fundraising.
According to the best scholars – still currently internet-based – there are at least two types of tokens: 

  1. one kind that does not incorporate a right for the issuer, which simply represent a buy option of a virtual currency not yet in issued; they simply entitle the initial buyer to receive a pre-determined quantity of virtual currency (hence a certain quantity of a medium of exchange which has a value only as accepted by a future market); their main characteristic is that the issuer does not become the counterpart of the lender, whose expectation is that the future currency acquires celebrity and credibility within the general market as to exchange it with a cryptocurrency convertible into a traditional currency and return to its investment;
  2. a further kind that incorporates a right towards the issuer; in such a case, the incorporated right can be the most diverse: from a traditional credit to a co-ownership right, a participation right to the decisions of the issuer or a subject of its issuance, a right to receive a service, from a right to use a computer platform, a right to receive royalties on its use by third parties, etc.
As will be seen shortly, the kind of rights linked to the single token determines its classification in different legally relevant categories by the legislators who are observing and studying the phenomenon to try to give it a regulation.
It goes without saying that the national legislators, the governments as well as the national authorities, in a first attempt to react to the diffusion of the ICO phenomenon, have underlined the characteristics of the tokens, and by analogy, they make them subsume within common and already regulated categories laws and regulatory provisions. Thus, tokens giving entitlement to a credit will be processed by regulators such as credit instruments, tokens which give rights to equity participation will be treated as shares and so on.

Some figures

As to understand which legal systems deal with the phenomenon of ICOs, a phenomenon that has reach the global public only during the last two years (in 2017 it seems that more than two billion euros have been collected) it may be useful to provide some numerical and statistical data.
i.e. according to icowatchlist.com, the number of ICOs launched in seven countries, representing four continents (America, Europe, Asia and Oceania) accounting to 56% of the issuances. The seven leading States by number of ICO launches are: United States ranked first with 17% of the number of issuances, the United Kingdom second with 10.5%, followed by the Russian Federation 8%, Switzerland 7%, Singapore 6,5%, Australia 3.5%, Estonia 3.5%.
Other players with a number of ICOs exceeding 1% of the number of global emissions were: Lithuania, Gibraltar, Germany and Canada with around 2%; Spain and Israel with around 1.5%.
Concerning the collection of ICOs, according to the aforementioned source, the country where ICOs have collected the largest volume of funds it was the Russian Federation (just under one billion USD, followed by the United States with little more than 800 million USD dollars, from Switzerland with 500 million USD, Singapore with 300 million USD, China with 200 million USD, Israel with 170 million USD, UK with 130 million USD, Gibraltar with 120 million USD).
The most interesting interventions of the authorities on ICO that are found on the internet are the following.

The United States intervened with an opinion of the SEC president on July 25, 2017; the Canadian Securities Administrators issued a document on August 24, 2017; the Australian Securities and Investment Commission (ASIC) intervened in September 2017; for further in September 2017 the Securities and Future Commission (SFC) of Hong Kong intervened (after China banned ICOs on the territory of the mainland); the Monetary Authority of Singapore (MAS) issued a document in November 2017; the Finantsinspektsioon (FI) Estone issued a statement at the end of 2017, and a regulatory intervention is expected for the beginning of summer 2018; more timid hints are found by the Financial Service Agency of Japan (the press release is October 27, 2017) and the European ESMA (warning of November 13, 2017). Lastly, following repeated requests for a ruling on their legal status and legal status, the German Federal Financial Supervisory Authority (BaFin) also intervened with a note issued on February 20 last on obligations relating to ICOs.
The two most interesting documents to date, as well as some aspects of Singapore, as will be explained below, are the Practical Guide to the ICO of the Swiss Financial Market Supervisory Authority (FINMA) issued on February 16, 2018 and the updating of the discussion document (discussion paper) already published in December 2017 of the Financial and Securities Commission of Gibraltar (FSC), which intervening in February 2018, promised the first effective regulation for May 2018.
Finally, the position of South Korea that on 29 September 2017 has prohibited the issuance of ICOs on Korean territory, similarly to what China has done, cannot be dismissed.

Legal definition of ICO

With no aim to deepen the analysis of communications and measures mentioned above, all traceable on the web, it is considered useful to provide a summary of the main issues that the various regulatory bodies of capital markets wanted to address, and which can also serve the national legislator as compass to launch a possible regulatory provision.
We note a decisive step forward from the first reaction of the various regulatory bodies, just over a year ago, aimed at warning the legislator and the public from the three main risks related to the ICO: the chance of raising funds anonymously in disregard of the anti-money laundering and anti-terrorism regulations, the general risk of fraud for investors and the risk associated with the conservation, enhancement and settlement of tokens.
Today, in fact, the authorities that have been concerned with disciplining them fully recognize firstly how the ICOs have a positive economic function, and represent an unavoidable phenomenon.
The first topic treated by many authorities is the definition of ICO and consequently of token; on the ICO theme there is a certain convergence of the operators on the concept of “innovative ways of collecting money from the public”, which seems to be a good synthesis of the concept, from the point of view of the regulator oriented to the protection of a specific interest (the public savings).
It is wondered if a possible regulation is useful, that only some authorities make and that the collection of funds is not destined for projects c.d. “Charity” and therefore expressly intended for an industrial and commercial activity but not altruistic or charitable.
Trying to provide a definition, the conceptual limitation towards the non-profit world does not seem necessary; it is true that the ICOs have so far been born as a speculative and not beneficial phenomenon. But there is nothing that makes it impossible to use ICOs to raise funds for charity projects (think of e.g. a project in which the token allows to express its vote on particular spending choices of the sums collected) . In the latter case, perhaps the protected interests are less complex than in the case of an investment in an economic activity (the lender loses any rights on the money disbursed from the moment he transfers it), but also the ICOs for profit can find discipline (perhaps simplified) in the general legislation of initial speculative coin-dealing.
Exception made for the Russian legislator, no state authority seems to deal with a further aspect concerning cryptocurrencies, such as the de Minimis threshold which shall mark up the baseline for an ICO to be regulated by the legislator; in fact, an ICO may rely on a largely spread network of people at a low fee, may allow investor to take part to the project with really low investments.
Nevertheless, the fact that people invests really low sums on a ICO, it does not classify the project as scope less, but on the other hand an ICO with a low buy-in threshold (perhaps within EUR100 or USD100) would it really need a government control over the project?
It may be claimed that a low investment portfolio may not need a government control due to the fact that fraud schemes, even though still classified as crimes, would not cause a social harm.
On the other hand, based on unofficial web news, the Russian legislator seems to have set a threshold up to 50.000 Russian ruble (approx. EUR 900) as a max. investment for a non-qualified investor, while no threshold seems to have been established for qualified investors (within the secondary market).

Token definition

The definition of token has been – as it may be expected – a purpose of discussion: on one hand, it has been classified as analogous to coins (viz. I.E. the European ESMA and the Australian ASIC) while on the other hand it has been clearly distinguished from the latter; almost all Authorities have categorized the token based on the rights within it: perhaps the Estonian FI, the Singaporean MAS, the Gibraltar FSC and the Swiss FINMA. Also the German BaFIN hasn’t provided an overall definition of token, relying on the several forms that a token may have due to the right incorporated within it and that can be transferred, furtherly stating that a case-by-case approach shall be taken as to identify the proper use of a token.
As for now, authorities have been classified tokens on three main categories: object representing future coins; object representing debt instrument and bonds, stock and shared, derivate; object granting a future service (viz. I.E. the FINMA guidelines on ICO).
From the classification of tokens in one of the above-defined categories, an ICO may fall either on the public offers of goods or services, debt instruments, participation securities, or derivatives regulation.
It is newsworthy to point out that some up-to-time legislations (I.E. the Australian ASIC interpretation) offers some kind of protection for the purchaser of tokens, even if not considered as financial products or contracts based ion the consumer protection regulation (which entitles the purchaser to withdraw from the investment within a granted timeframe).
Having seen the approach adopted by some authorities (I.E. the Singaporean MAS provide six examples to be used as to classify the ICO), it seems convenient to rely on a much more pragmatic approach adopted by the US SEC President based on the so-called Howey Test (viz. the US Supreme Court case SEC vs. Howey, 1949) which is not based on the distinction of financial products and goods but investment goods and contract, classifying the latter as “an an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.”, which is useful to protect people investing  either in financial contracts either in investment contracts.
With no intention to deepen the analysis of the two concepts (the Howey test relies on a subjective element – such as the intention of the investor – which is not recalled under the EU definition of financial contract) it is clear that applying the Howey test to tokens seems to be much more convenient as to rely on the savings protection regulation.  
As a matter of fact, the classification of tokens within the category of investment contracts instead of financial contracts seems to overcome a grey zone that comprises those token that do not constitute neither currencies, neither goods nor services, but that still have a speculative nature. It shall not be forgotten that as for now ICOs have been developed in the field of start-up and project financing, which goods or services is far from the actual existence and the protection of the token purchaser.


A further common element, which has been discussed by the Authorities that have tried to provide a comprehensive overview of the phenomenon, it is the ICO territoriality; thus, the ICO which have been launched by an issuer having its legal or operating establishment within a territory, as well as the access to the ICO (independently from the launch), are falling under the specific jurisdiction of that territory.
It is newsworthy the Gibraltar regulation that extend the concept of territoriality to companies issuing or setting up  an ICO eventually controlled from Gibraltar due to “reputation” reasons.
Considering the unregulated and global nature of the web, which allows a potential issuer to cheaply reach any internet connection, it is clear that the matter of the ICO territoriality cannot be overcome easily based on what the issuer is stating; hence, an ICO seems to be considered as falling under all national legislations, other than the one the issuer is subject to, as long as the issuer is not limiting the range of purchasers to pre-determined Countries. 
However, since most ICOs base the collection phase on the use of a cryptocurrency to minimize the costs of accession, a territorial limitation in the phase of buy-in to the offer can only be achieved through the request of the buyer identification and the related verification, (which needs a further activity compared to the simple sale of the token that could be realized through the free-of-charge blockchain technology), which increase the issuance and joining cost of an ICO (with no prejudice to the possibility of using intermediaries within the cryptocurrency world users).
It is clear that the territoriality principle shall be based on a domestic or transnational jurisdiction, which constitutes a divide between Countries requiring ICOs issuers to identify purchasers and Countries that have not yet elaborated a ICOs regulation, thus allowing to reach foreign purchasers with no further need of identification.

Regulated subjects

At least but not last, it is useful to consider the attempt within the different legislators to classify the individuals and organizations falling under a possible Crypto-regulation: a common denominator is based on three kind of subjects: (i) the issuers; (ii) the organizations that provides services on the crypto market; and (iii) the organizations that provides ancillary services (in particular for the consulting and launch of ICOs).
The (i) issuers falls under the regulation of each Country that have elaborated a set of norm on ICOs; hence, when launching an ICO the issuer shall provide a detailed prospectus due to the principle that the best protection for investors is the awareness on the purchase (viz. the Hong Kong Authority has suggested to provide a detailed prospectus for each ICO launch, while the Australian Authority requests a prospectus only if a token comprises the right to purchase shares; on the other hand, Singapore has stated that the prospectus will be due only if the token comprises the right to purchase financial contract or a common investment scheme; lastly, Gibraltar requests the legislator adopt a case-by-case approach to assess if a prospectus is needed.
The FINMA – lacking and awaiting of a specific Swiss regulation – has provided a table of basic information that the issuer shall provide before the launching of an ICO.
For further, all the (ii) organizations that provides services on the crypto market, as well as (iii) providing ancillary services are subject to declaration within the State Authorities that have recently regulated cryptocurrencies And ICOs.
Gibraltar, (within the discussion paper for the regulation of token and ICO) requests the ICO issuer to be advised by a sponsor with proper knowledge and experience as to respect the market regulations; for further, Gibraltar requires the sponsor to adopt public codes of conduct comprising best practices and to be recalled within their agreement with all the ICOs issuers.
Furthermore, forms of advertising are required to allow both the market and the issuers to be informed on which ICO launches are supported by a specific sponsor and the interests of the sponsors in the launch. Finally, it is required that the same rules of registration, self-regulation and publicity applies to the organizations that provides services on the crypto market.
Lastly, all the regulations deals with the contrast to domestic and international terrorism and anti-money laundering, also referring to ICOs.
Up to 2018, a first conclusion can be drawn: after the bitcoin bubble of last year, the interest of the public and consequently the regulators has shifted from the phenomenon of cryptocurrencies tout court to the phenomenon of ICOs; as for today, ICOs are giving a shock to the world of finance, revolutionizing the process of collecting money from the public on a global scale.
The ICOs allow the collection of money in a global scale with negligible costs, allowing an entrepreneur to finance an idea that appropriately explained and shared online with a detailed prospectus or a simple white-paper is able to obtain the trust of global “investor users”.
In a perfect way, the task of national and transnational regulators shall be to avoid and punish deviant behaviours that may result in social harm (fraud, illicit use of funds raised, etc.) without frustrating the value of ICOs in terms of an instrument of high potential fundraising. Unfortunately, not all the regulatory or interpretative interventions up to now have been inspired by these simple principles.



Silvio Rizzini Bisinelli


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Barbara Bordin

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