An ICO is an online fundraising method, with some similarities to an IPO in the stock market. A cryptocurrency start-up issues initial tokens based on blockchain technology and sells them to investors in exchange for other established cryptocurrencies like Bitcoin or Ethereum. Then the start-up can sell the virtual coins collected from investors so as to accomplish rapid financing.
Simply put, the start-up that wants to raise funds first announces the new issue of a cryptocurrency on the Internet; then it asks investors to buy Bitcoins and other virtual goods so as to exchange them for the new cryptocurrency. In order to attract investment, the start-up usually claims that its cryptocurrency will be as valuable as Bitcoin, and that its price will surge dozens of times over. Although investors don't pay money to the start-up directly, buying cryptocurrencies still costs money and the cryptocurrency they buy isn't equivalent to holding a stake in a company.
Due to the relatively high technical threshold, ICOs saw only modest growth after the completion of the first one in July 2013, with annual financing of merely $14 million globally in 2015. However, with the development of blockchain technology and the success of some projects, there has been an investment boom in ICOs in recent years, particularly in China, where ICOs have raised billions of yuan since the beginning of this year. Some ICO projects could finish their sale within hours or even minutes, with lots of ordinary investors following suit to buy into it. It is due to this reason that the prices of Bitcoin, Ethereum and other cryptocurrencies have soared recently.
ICO projects are generally related to blockchain technology and only receive virtual goods with good liquidity, such as Bitcoins, as investment, thus escaping from the suspicion of illegally absorbing public deposits. But there is huge risk in ICO projects, which are subject to no threshold, no standards and no regulation. ICO platforms and projects are established on the Internet, allowing platforms and investors to circumvent regulatory institutions to issue and buy into overseas ICO sales, making it difficult to identify and regulate illegal practices during the process. Also, there is no track record and little constraint for virtual goods transactions on such platforms, which could easily become channels for money laundering or terrorist financing.
More seriously, most ICO projects are actually not real financing, but illegal fundraising and financial scams under the name of blockchain and cryptocurrencies. Some start-ups create white papers for false projects like gambling, dating platforms, gold mining or even projects set up in the Cayman Islands, which are impossible for investors to verify. Even more bizarre is that some ICO projects can defraud investors of millions of yuan within several days. (Source: Global Times)
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