ICOs are not just shaking up the world of blockchain and cryptocurrencies. They also have profound implications for the global economy and traditional financial models. By providing direct access to global financing, ICOs have made investing in innovative technology companies more accessible. This model, still young but in full expansion, has redefined the relationships between companies, investors and financial institutions.
A new form of global financing
One of the most striking aspects of ICOs is their global reach. Unlike traditional financing which often relies on networks of local or national investors, ICOs have enabled startups based in emerging regions to raise funds on a global scale, without going through traditional intermediaries such as banks or venture capitalists. In 2017, for example, projects like Filecoin and Tezos raised hundreds of millions of dollars through ICOs that attracted investors from around the world.
This phenomenon democratizes access to capital, allowing ambitious projects to be born without being constrained by geographical barriers or the requirements of traditional financing. At the same time, this allows individual investors (often called “retail investors”) to participate in projects that they would never have had the opportunity to support in traditional financial systems.
Case in point: The Filecoin ICO, a decentralized storage project, raised $257 million in 2017, making it one of the most lucrative ICOs of its time. The project attracted investors from different continents, perfectly illustrating the global aspect of ICOs. This kind of fundraising was almost unimaginable in a traditional financial system where startups had to convince local institutional investors, generally based in financial centers like New York or London.
Decentralization and democratization of investments
ICOs have embodied a step change in the investment landscape, not only enabling global access to capital, but also providing small investors with the opportunity to participate in early-stage fundraising. Traditionally, only institutional investors or those who benefit from a developed financial network have had access to the first stages of financing a startup. This limited the possibility for thousands of people interested in technological innovation to be able to support new projects.
With ICOs, any individual with an Internet connection could participate and become an investor, often with a minimum entry amount, which allowed a community of passionate investors to form around blockchain projects.
Decentralization, which is at the heart of blockchain, is thus reflected in the financing model of ICOs. Instead of going through a hierarchy of banks and intermediaries, blockchain allows for complete transparency and a financing process that is open to everyone. This innovative approach contrasts with traditional financing, where startups must often accept strict financing conditions dictated by institutional investors.
Case in point: Ethereum, one of the most widely used blockchain platforms, conducted an ICO in 2014 to raise funds for its development. Instead of relying on institutional investments or venture capital firms, Vitalik Buterin, the creator of Ethereum, tapped investors from around the world. Thanks to this ICO, Ethereum was able to raise $18 million at a time when blockchain was still an emerging technology.
ICOS: A response to the financing needs of blockchain projects
ICOs have been particularly useful in an industry like blockchain, where innovative ideas often require significant initial investment to bring to fruition. Blockchain startups have high financing requirements to develop their technology, create decentralized infrastructures, and attract talent capable of transforming an idea into a functional product.
ICOs offer a direct solution, allowing companies to raise funds without having to go through traditional financing channels, which are often time-consuming, expensive and limited in terms of access.
ICO and establishment of a decentralized network
A striking example of the use of an ICO to finance a blockchain project is the case of Polkadot. Polkadot is a project aimed at connecting multiple blockchains to facilitate interoperability between them. Implementing such a project requires significant resources, both in terms of technical development and recruitment. The Polkadot ICO raised over $145 million, facilitating the creation of interoperable blockchain infrastructure that was impossible to finance through traditional channels.
ICOs therefore allow blockchain startups to focus on developing the technology rather than spending months seeking funding through traditional investors, who are not always familiar with blockchain and cryptocurrencies. The flexibility they offer is one of the great assets of this model.
The impact on the regulatory and legal environment
Despite the undeniable advantages of ICOs, the lack of regulation has generated a series of risks and legal problems. Many ICOs have been marked by fraudulent practices or projects that failed to deliver promised products or services. This lack of clear regulation has led some investors to find themselves without legal recourse in the event of project failure.
To resolve this issue, several countries have implemented specific regulations on ICOs, seeking to protect investors while not hindering innovation. For example, the United States has adopted a pragmatic approach, recognizing that certain ICOs are in reality issuances of financial securities (securities), and must therefore be regulated accordingly. In contrast, in other jurisdictions, such as China, ICOs have been banned due to concerns about their impact on the economy and the risks of excessive speculation.
Towards a more secure and transparent future
Recent regulations aim to provide a safer environment for investors while encouraging innovation. Smart contracts, which are used in many ICOs, must undergo rigorous security audits to ensure that the code does not have exploitable vulnerabilities. In addition, the implementation of KYC and AML (Anti-Money Laundering) standards helps combat fraud and ensure that investors come from regulated jurisdictions.
Case in point: The DAO, one of the first projects to launch an ICO on Ethereum in 2016, suffered a major hack that resulted in a loss of millions of dollars. This incident was a tipping point for the blockchain community and highlighted the need for better security and safer practices. Since then, ICOs have gradually adopted more rigorous audits and strengthened security measures to avoid such failures.
Conclusion: ICOS, a lever for innovation but to be mastered
ICOs have been both a driver of innovation and a challenge for regulators. If they made it possible to raise funds in a more democratic and rapid manner, they also exposed investors to increased risks, in particular due to the absence of clear regulation. ICOs have launched many large-scale projects that have shaped the blockchain and cryptocurrency industry, but they have also highlighted security, management and transparency flaws.
The future of ICOs will depend on the balance between regulation and innovation. Blockchain projects that successfully combine decentralized governance with high transparency and security practices will be the big winners of the next decade.
