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Decrypting the Crypto Bubble : China Ban Vs. Thailand’s cautious welcome

ICO has gained popularity among tech startups as a convenient and timely way to access funding. In the past few months, ICO has grown exponentially and has surpassed early stage venture capital funding

Olivier Languepin

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Twenty years ago, day trading was the great new pastime for Americans, all of them tuned to the financial news and reports on the day’s newest crop of IPOs.

Main Street America had no idea what these dotcom companies were doing; all they had to do was buy shares in a new IPO and count their money.

The same thing appears to be true of ICOs today. Most people involved in the cryptocurrency boom have very limited knowledge of what is exactly behind the terms of “mining” or “blockchain”.

Adding to the market uncertainty with the emergence of the ICO or initial coin offering – is the unregulated entry of multiple crypto currencies and blockchain based tokens into the marketplace.

There is a large degree of speculation on these Alt coins, and some less than honest offerings. ICOs and Alt coins are particularly susceptible to ‘pump and dump’ actions which drive the profile and price of the coin high, only to be sold off at peak prices and are then largely abandoned.

Against this backdrop, the SEC, which regulates securities, has been hovering, trying to get a handle on the situation.

While that federal agency hasn’t forbidden the new issuance of token-based companies, as China did earlier this month, it’s trying to figure out rules that would protect investors from scams.

As of this writing, there are nearly three dozen ICOs underway, with countless others on the horizon.

Naturally, the crypto industry (which welcomes regulation, up to a point) isn’t standing around waiting for new rule making and is trying to get ahead of the problem. Among other things, it’s begun a rebranding effort of sorts that goes something like this:

ICOs vs. TGEs

There are several different factors that have led to the dramatic spike in ICOs this year. The first is the longstanding pain point of every entrepreneur of fundraising. Raising capital from venture capitalists is a long, tiring, all-encompassing process that no entrepreneur ever enjoys and always takes too much of her time away from building her business.

Paul Ark (Polapat Arkkrapridi), Managing Director of Digital Ventures

A “TGE” is a “token-generating event,” which is what happens when a startup issues new currency. (Good explainer here.) How does a TGE differ from an ICO?

For starters, ICO sounds like IPO, and IPOs involve issuing stock, which is very much a security and a red flag to regulators. Industry lawyers point out that a good many token offerings really and truly are not securities.

Take for instance a company that’s financed via “utility tokens,” meaning the coin can be redeemed for a good or service on the issuing platform.

Whether people actually redeem the tokens for services, or hoard them in the expectation that the platform will become more valuable over time—and hence the coin will increase in value—is unknown to the company issuing the token.

In this way, crypto people will tell you, utility tokens are like condominiums—when someone buys a condo, they might live in it, or flip it. Regardless, it’s not considered or regulated as a security.

The Pump and dump risk profile

There is a large degree of speculation on these Alt coins, and some less than honest offerings. ICOs and Alt coins are particularly susceptible to ‘pump and dump’ actions which drive the profile and price of the coin high, only to be sold off at peak prices and are then largely abandoned.

Other offerings sell investors on ideas that never manifests or are deliberately vague in their value propositions to the point of dishonesty. But as a macro trend, Alt coins are positioning themselves to solve real world and future world problems.

Ethereum is a platform for blockchain innovation and is the technology underwriting many of these new crypto currencies. Ethereum brings with it a broader range of applications than Bitcoin, such as smart contracts and distributed automated organisations, which have at their heart a ledger of transactions verified by the blockchain.

China Ban Vs. Thailand’s SEC cautious welcome

In September, the People’s Bank of China (PBOC) announced an outright ban of ICOs and cryptocurrency exchanges. However, many observers believe that this is a temporary ban while the PBOC studies the issue and draft a regulatory regime.

With the exception of China’s announced ban on ICOs and closure of crypto-exchanges while regulators investigate ICOs, most regulators around the world have taken a more cautious approach and avoided outright bans

SEC Thailand’s Viewpoint on ICO

The Securities and Exchange Commission, Thailand (SEC Thailand) has been following the development and the growing popularity of initial coin offerings (ICO). ICO refers to a digital way of raising funds from the public. In an ICO process, ICO issuer will offer digital tokens in exchange for cryptocurrency, such as Bitcoin or Ether.

Since the digital tokens can diverge widely in design and representation, some may resemble financial returns, rights and obligations in similar ways to securities under the Securities and Exchange Act.

ICO has gained popularity among tech startups as a convenient and timely way to access funding. In the past few months, ICO has grown exponentially and has surpassed early stage venture capital funding.

As a result, financial regulators, including the SEC Thailand, are concerned that in some cases ICO may be deliberately used as a tool for fraud or scam.

The SEC Thailand encourages access to funding for businesses, including high potential tech startups, and realizes the potential of ICO in answering startups’ funding needs. In cases where an ICO constitutes offering of securities, the issuer will need to comply with applicable regulatory requirements under the SEC Thailand’s purview.

Nevertheless, the SEC Thailand understands the unique environment in which tech startups operate and realizes that ICO may not yet fit neatly with SEC Thailand’s current regulatory framework. Therefore, to strike the balance between supporting digital innovation and protecting investors from potential ICO scams, the SEC Thailand is considering appropriate approaches on ICO and welcomes comments and suggestions from the private sector.

The SEC Thailand would like to advise any investor interested in investing in an ICO to seek to understand the benefits and risks associated with the ICO. In addition to general risks faced by startups, investors are exposed to heightened risks of price volatility, inadequate liquidity,
cyber security, as well as potential fraud and scam. Given ICO’s cross-border nature, legal protection and recourse for investors may be limited or not applicable in most cases.

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