Initial coin offerings (ICOs) have caught fire across virtually every industry as a new form of crowdfunding. However, the rapid emergence of token-based fundraising activities has drawn caution from the Securities Commission of Malaysia (SC), given the potential for abuse and investor risk.
ICOs have quickly risen in popularity in tandem with the meteoric rise of cryptocurrencies such as Bitcoin and Ethereum. ICOs are characterized as fundraising mechanisms via the issuance and sale of digital tokens, in exchange for investors paying for these tokens through virtual currencies.
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The regulatory stance on ICOs is highly variable and has been thrust into the spotlight given such widespread emphasis on token sales this year. The SC has warned investors against ICOs, also known as token pre-sales or crowd-sales – the potential for investors not recouping any returns on their investments stands as a problematic attribute surrounding ICOs.
Other jurisdictions have taken a much harder stance against ICOs, going far beyond simple warnings or cautionary statements. Earlier this week, Chinese regulators banned blockchain startups raising funds via ICOs. The decision was made in collaboration with the China Securities Regulatory Commission, the China Banking Regulatory Commission and the China Insurance Regulatory Commission.
China has to date been the epicenter for the ICO market, though the move is likely to see an outflow of ICO activity to other Asian countries. Prior to the ban, China accounted for 60 percent of investors in the ICO space.
The precautionary stance against ICOs from the SC could also serve as a viable education tool for domestic investors, many of which may not be familiar with token crowdsales. ICOs are structured in many different ways, with the majority including direct investments in projects with the aim of enabling token holders to participate in a share of the returns from the projects.
Moving forward, it will be interesting to see if other regulators address ICOs, which has remained a blind spot for many regimes. As the global ICO market continues to swell at a frenetic pace, other regional regulators may soon be joining the SC in informing investors of token sale activity.