WorksheetsChapter 13 Initial Coin Offering (ICO)
Total questions: 20
Worksheet time: 14mins
What is ICO?
financing method for the private company to fund technology projects
offering investors the right to buy digital tokens / coins
financing method for the public listed companies
offering investors the right to buy companies' equity
Unlike IPO and crowdfunding, investors in ICO can only hope that...
They can make a profit from the digital tokens/coins that they purchased from ICO
The projects of the ICO companies would be successful and the tokens will then rise in value
They can make a profit from the companies' equity that they purchased from ICO
The projects of the ICO companies would not be successful and the tokens will then drop in value
Is ICO a permitted form of financing/fundraising for private companies in Malaysia? Why?
No. Regulators in Malaysia prohibited ICO as financing
Due to various risks associated with direct fundraising between private companies and investors, regulators introduced IEO to replace ICO to add cryptocurrency exchanges as intermediaries.
Yes. Regulators in Malaysia permitted ICO as financing
Due to the simplicity of direct financing between private companies and investors, regulators deemed that removing intermediaries such as FIs as would be a better option to boost MSMEs development
Which of the following describe the differences between IPO and ICO?
in IPO, the public listed company sells equity via regulated exchanges. in ICO, a private company sells digital tokens/coins without any regulated exchanges
Investors of IPO become the owner in the operation of a company. Investors of ICO have a right to the project's future service/products of the private company
in ICO, the investors will have the ultimate right to the operation of the private company. in IPO, investors become the owner in the operation of the company as well
Which of the following describes the differences between crowdfunding (CF) and ICO?
CF is the intermediary that engages lenders (donors, backers, investors) and borrowers (Project owners, creators etc) in a contractual relationship for varying purposes
ICO does not need an intermediary or middleman to engage investors and private companies instead, they use blockchain technology as market-maker
Investors of CF have a clear disclosure on the investment potential of the product/service.
investors of ICO private companies are merely explained on the ideational of products/services
Investors in ICOs find it difficult to evaluate the projects' soundness and the viability of the project's token economy.
Lack of due diligence
No tangible product
Lack of transparency
Dilution
Marketing and ICO sale
Many investment risks are not disclosed to the potential investors since the company would likely market their business idea in the most favourable light. This discouraged investors to make informed decisions and forced to carry out their own due diligence. There is no independent authority to enforce disclosure requirements.
Lack of due diligence
No tangible product
Lack of transparency
Dilution
Marketing and ICO sale
ICO issuers may raise more funds by issuing more tokens or altering the functionality of tokens. This is uncertain causing the token's valuation to fluctuate. Such decisions are solely made by the company and investors do not have any recourse to control the company's decision-making.
Lack of due diligence
No tangible product
Lack of transparency
Dilution
Marketing and ICO sale
Products/services are merely a concept outlined in the published whitepaper. Token investors are investing in a business idea, a future promise of the idea associated with the platform.
Lack of due diligence
No tangible product
Lack of transparency
Dilution
Marketing and ICO sale
Companies engage in aggressive marketing tactics which usually involve unaccountable parties such as celebrities, social media influencers etc
Lack of due diligence
No tangible product
Lack of transparency
Dilution
Marketing and ICO sale
Difficulty to assess the business rationale for the blockchain used or the token issued.
No utility behind the Blockchain
Open-source risk
Protocol-related risk
Cybersecurity risk
Data security
The danger of individuals maliciously exploiting the codes in the open-source software to extract sensitive information or misappropriate digital tokens.
No utility behind the Blockchain
Open-source risk
Protocol-related risk
Cybersecurity risk
Data security
Risk of malfunction or other technical fault affecting the functioning of the underlying blockchain technology, affecting the product development and the issuance of tokens
No utility behind the Blockchain
Open-source risk
Protocol-related risk
Cybersecurity risk
Data security
Investors may not know whether the required data security framework has been implemented and runs the risk if that is not the case.
No utility behind the Blockchain
Open-source risk
Protocol-related risk
Cybersecurity risk
Data security
The risk such as disruption of business, reputational damage, and financial loss due to the operating systems functioning without adequate safeguards from the cyberattacks
No utility behind the Blockchain
Open-source risk
Protocol-related risk
Cybersecurity risk
Data security
Either no direct regulation or the wait-and-see approach but opens the door for Black Swan risk
Regulatory uncertainty
Ponzi Scheme and Scams
Money laundering and illicit activities
insider trading and market manipulation
Speculative 'Pump and Dump' behavior
Due to the benefits of instantaneous transfers and anonymity, illegal proceeds can be 'cleaned' from the actual token holders and cashed out the tokens. Some may use ICO to evade tax, fund terrorism or contribute to the development of dark markets.
Regulatory uncertainty
Ponzi Scheme and Scams
Money laundering and illicit activities
insider trading and market manipulation
Speculative 'Pump and Dump' behavior
ICO may capitalize the information asymmetry and influence price formation, engage in spoofing practices
Regulatory uncertainty
Ponzi Scheme and Scams
Money laundering and illicit activities
insider trading and market manipulation
Speculative 'Pump and Dump' behavior
ICO may capitalize the information asymmetry and influence price formation, engage in spoofing practices
Regulatory uncertainty
Ponzi Scheme and Scams
Money laundering and illicit activities
insider trading and market manipulation
Speculative 'Pump and Dump' behavior
How ICO encourages heavy speculation activities such as pump and dump behaviour to manipulate the market?
Speculators are short-termism and exploit the token volatility by capitalizing on the movements in the market
Speculators no longer support tokens as a utility value but because of the high liquidity premium as a quick profit
The assumption that the product/service developed will become popular and as new users are on-boarded, early token purchases will be heavily rewarded before mass adoption
ICO urges investors to buy tokens through misleading messages to pump up the buying frenzy
Once ICO is over, they either disappear with the collected funds or dump their tokens for a large profit, leaving other investors to lose money
