Corporate financing through Initial Coing Offerings (ICO)

Train Smoke - Edvard Munch

Para ver la version en castellano ir a este Link

Blockchain technology allows a new form of alternative financing or fundraising  by companies, known as Initial Coin Offiring (ICO), this is, through cryptocurrencies.

To understand the use of cryptocurrencies as an alternative financing method, first it should be considered that a cryptocurrency is not an ordinary “money” or “coin” as known, at least, until now. This is because a cryptocurrency created by a company is not issued as money but an asset that include a right against the issuer. This asset is usually called a “token” and it works like a discount coupon that can be exchanged for something from the issuing company or as a credit against such company. The innovation is that a token is created with blockchain technology and, therefore, its guaranty regarding validity and transmission is reinforced.

An ICO can be executed with two very different purposes, either offering the cryptocurrency as an asset by itself (for example Bitcoin), or as a ticket/token, this is, as a right against the company that issues the cryptocurrency. In the first case the cryptocurrency may serve as a payment currency (like an official currency), may serve as a method to execute agreements, may be an asset to acquire other cryptocurrencies, etc. In the second case, its purpose is either to be recognized as a right against the issuing company, like a kind of share representing its share capital, but it is not recognized as equity, or to be a right to exchange it for products or services from the issuing company.

An ICO is not such a new kind of financing as may seem, excluding blockchain, because for example crowdfunding already works in a similar way. Through equity crowdunfing it is also offered equity participation and through reward crowdfunding it is also offered to acquire a product or a service from the company.

It should be remarked that an ICO allows the creation of a secure system to prove the ownership of the tokens and also to transfer them, but the risk of the investment is the same, as the importance of an investment is whether or not the business is interesting. Furthermore, there are still relevant security problems with the platforms that manage the tokens and its commercialization. Despite this, many investors are investing without taking into account the business but only the acquisition of cryptocurrencies, which is not a reasonable option.

Another relevant aspect to keep in mind is that the use of cryptocurrencies creates a safer system to issue tokens, but the same purpose can be achieved without using blockchain, as it has been the case for years. Whether or not it is worth using this technology depends on several factors and, in particular, on the cost of creating and maintaining the cryptocurrency, the cost of executing the ICO, and whether or not there will be a market to commercialize the crypotocurrency/tokens between users.

To summarize, an ICO is a new alternative kind of financing for companies, both for startups and companies already consolidated in the market. However, its use requires a previous analysis regarding its purpose and costs.