Initial Coin Offerings (ICOs) are a hybrid of traditional IPOs and crowdfunding. Ever since their advent, ICOs have become the premier avenue for capital raising activity for any businessperson who needs to raise funds quickly. As a result, there’s a growing interest in ICOs by regulators all over the world.
In this post, we will take a closer look at the emerging, lucrative opportunities ICOs offer, and how knowing your customers (KYC) first is crucial to leveraging them.
The Good and the Bad About ICOs
We’ll start with a neutral stance: everyone should be skeptical of ICOs.
They’re the wild west of the cryptocurrency world, where scammers run rampant because of a lack of regulations. And a lack of regulation equals a lack of transparency, which means you could end up losing your money to a scam.
Generally, contributions to ICOs are done for various reasons, ranging from the perceived usefulness of a new cryptocurrency to the speculated increasing value of a new alt- or colored coin. These two are the legal reasons that justify contribution..
Then there is the prospect of laundering money, which is an illegal activity. The lack of regulatory framework really makes it difficult for individuals looking to contribute to ICOs for the value they represent.
We hope that lawmakers will step in and try to find a way to regulate the ICO market space and protect citizens from falling prey to scams or becoming complicit in illegal activities while also letting the funding into promising projects continue. In addition, companies launching ICOs can practice caution themselves until a proper framework can be put into place.
Queue KYC aka Know Your Customer.
KYC and Why it’s So Important
Even though national governments do not have a clear framework overseeing ICOs yet, the simple yet powerful concept of KYC is very clear to everyone. With this, those running ICO campaigns can know the potential contributors’ identities before they make their contributions.
Yes, the very premise of Bitcoins and other decentralized currencies was to allow anonymity and freedom from verification when transacting in the digital assets. But it doesn’t eliminate the necessity of knowing that the party contributing to an ICO is a legitimate one. Being involved with criminals can put the conductors of the ICO at risk of being complicit in criminal activities themselves, whether or not they really were. That’s one of the reasons why KYC is a necessary requirement to make sure that potential contributors can legally take part in the ICO.
Another reason why the identity verification concept of KYC makes sense is that the SEC is planning to legally pursue ICOs that do not make KYC a necessity.
Finally, there is also the fact that if more and more ICOs and contributors comply with KYC voluntarily, the regulatory bodies may no longer need to put ICOs under too much scrutiny. As a result, ICOs will be able to reach a broader audience across the world and more regulatory bodies will allow the continuation of ICOs.
ICOs have immense potential for contributors and fundraisers alike. However, unless this emerging space is sufficiently regulated, contributors will remain cautious and risk-averse. While the authorities develop a regulatory framework, identity verification is a necessity for all the parties at stake. It can help root out, or significantly reduce, the prospects of criminal activity being conducted through ICOs and cryptocurrencies. It will help both contributors and creators of ICOs and, in turn, help the cryptocurrency world as a whole.