Holders of cryptocurrencies are sure that they are as valuable as usual money. Many investment funds, international companies and some countries support their use. In Japan cryptocurrency became a legal payment means. This further confirms people's beliefs.
But in the most countries cryptocurrency cannot be bought in banks for money and paid for purchases. This is because the regulatory authorities appeared not to be ready for the fast spread of cryptocurrencies and do not trust them. Some countries want to legitimize cryptocurrencies, while others prohibit their use or plan to do it, including fund-raising and trade on exchanges.
Regulatory authorities are worried that a technology that allows to quickly and anonymously transfer big amounts can be used for money-laundering, while many ICOs look like a fraud or pyramid scheme.
Legitimacy and legal defense
For now ICOs are made according the rules of cryptocurrency community. But these rules are not obligatory, are not written, no one gets punished if they were not fulfilled. If somebody will steal the money, it will be very hard to get them back.
The rules of ICO must be confirmed by the law, so that governments will be able to provide security on the market and protect the investments. They also must comply with the laws against money-laundering, laws concerning protection of personal and confidential data, money transfers and payments.
Before drafting the law on cryptocurrency markets, regulatory authorities need first to study this technology and risks connected with it. Until then, different countries made their own decisions. China prohibited ICO and exchange of cryptocurrency to money, and ordered to return all raised funds to the buyers. South Korea has banned ICOs, following China’s example. In USA and Singapore ICOs were subjected to the Security Market Act. Brazilian funds were forbidden from investments in cryptocurrencies. In Russia ICOs and participation in them are not banned.
But even if all countries develop and adopt cryptocurrency laws, without international regulation, every particular country will have its own rules. ICO, which attract funds from foreign citizens, will have to consider them all, and investors will have much more obstacles in protecting their money. Moreover, every state has other laws, and the participants of ICO can be brought to justice for breaking any of them, anytime.
Safeguards and profits
ICO is a form of fundraising. In exchange for the money, a buyer of tokens hopes to receive some utility from the company or sell it at a profit in future. Projects that give a profit-sharing right or a share in a company, are very rare.
ICO terms determine what will an investor receive. They are listed in the white paper, but these are more intentions than obligations. When tokens buyers transfer the money, they automatically agree with everything. Some companies use this and compose the terms in such way which lets them to return nothing to investors and then ICO becomes a collection of donations.
МobileGo team spent only 2 millions on the development out of total $53m raised, the rest of the money became the developer’s remuneration. Some investors were unhappy with that.
The person who bought tokens, will get profit according the terms, but only if company will successfully launch the project and the price of tokens will grow. If the project will fail, the buyer will lose the investments.
The most of the projects going to ICO are start ups. They are on the earliest stage of development. Many teams hardly imagine how to develop a business and attract clients. Others hardly understand what can give ICO to their project and what they can offer to investors.
According Etherscan.io, by the end of August, 2017 only on Ethereum platform 6000 tokens were issued. And only 50 of them had a volume of trade over $1m. According to RBC, by November 84 of 100 of the biggest ICO did not have a working product or service.
Venture fund Mangrove Capital made an experiment and invested €10 000 in 204 projects. Only 10% were successful, but at the same time they showed a profitability over 1000%.
Apart from project failure, ICO participants have other risks.
The technology of raising money easily and fast attracts many fraudsters. Some companies making ICO do not plan to launch a product or develop a project. Or organizers can flee taking the raised funds. Tezos’s ICO raised $253m but the product was not launched. Investors filed a collective fraud claim.
In August, 2017 a would-be staff of Numerai fund spread the link to the copy of the website through a Slack messenger, lured the keys to the users wallets and withdrew all tokens. Fraudsters managed to steal $1,5m from 350 wallets of members of 7 projects.
ICO participants can also lose money due to hacking attacks. During ECAT tokens sale, some crackers hacked into the project’s website, changed the address of the wallet and stole $400 000.
Even if attackers fail to steal the money, their actions still interfere with ICO and the market in whole and can lead to project closing. On June 17, 2016 a hacker found a vulnerability in The DAO code and withdrew tokens worth $65m. Token’s rate dived at 60%, ether’s price also started to lower. All fund’s money were taken to return the investments.
Tokens market prices change as fast as cryptocurrency rates. Market players behavior or government policy can become a reason for the change.
For example, tokens price lowers when investors find other more profitable projects or massively sell them to benefit from price differences. When China had announced that they planned to close all trade platforms, cryptocurrency rates had fallen by 10%.
Anonymity and absence of legislation in cryptocurrency sphere allows people to avoid taxes. Many countries request from organizations working with cryptocurrencies to verify the identity of persons who give them the money in order to check their origin. But the tax problems are still not solved in lots of countries.
USA States Revenue Service considers cryptocurrency as a property and investment tool. Similar to shares, income from operations with cryptocurrencies must be stated in annual tax returns. In EU countries cryptocurrency is not considered as a property but can be taxed as capital gains. In Japan and China operations with cryptocurrency are taxed as income and capital gains. Additionally cryptocurrency sale can also be a subject to VAT in China. A similar law is being drafted in South Korea.
In Russia one doesn’t have to pay taxes for operations with cryptocurrencies, profit-making or participation in ICO. But tax service may have some questions when you will exchange cryptocurrencies to fiat money.
Investing in ICO: how much?
Any investment involves a risk and every investor can lose their money forever. That’s why it is better invest in ICO only the amount of money you are ready to lose.