More often than not, Token Sales are being referred to as ‘a regulatory wild west’ by media, financial and regulatory commentators, having earned the reputation for being an unregulated frontier, where investors are periodically defrauded.
That is not to say, however, that there have not been many successful token sales, carried out with transparency, compliance, and accountability for investors. In some cases, these successful sales have the potential to give investors large returns on their initial contribution.
Lack of regulation and government intervention can allow for forward-thinking, innovation and the creation of exciting new financial technology without the usual constraints. Furthermore, it is difficult for regulatory agencies to regulate when they do not fully understand the industry. This emphasises the need for strong collaboration between regulatory agencies and the industry in order to ensure appropriate regulation for this nascent industry.
There is no doubt that when properly implemented, regulation can ensure markets are more efficient and equitable for investors. Innovation is not without risk, and the recent exponential growth of token sales has shown that there are areas of the ecosystem that are potentially fraudulent, raising doubts about the long-term prospects of the token sale environment, particularly if it is not addressed by regulators globally.
As they garner more media attention and investor interest, the biggest problem facing token sales is that they are unregulated. The industry is left to self-regulate, or indeed not regulate at all, leaving investors open to huge risks and potential losses.
While token sale projects in general show genuine and exciting technological promise, there are clear indicators of fraud that should be considered during the investor due diligence process.
Key Red Flags that should draw investors and regulators attention include the following:-
- A team with no domain experience, or an advisory panel with no credible finance/technology background;
- Insufficient information in the White Paper about the proposed project or token;
- Lack of existing presence and historical traction in the relevant industry sectors;
- No clear roadmap for the future, or unrealistic goals in their implementation plan;
- Lack of a transparent governance framework or clear regulatory awareness.
The token sale market is in its infancy and as such, is deemed to be a high-risk investment. Many regulators have communicated this fact to consumers publically, but as yet, have not published concrete unifying regulation for the industry as a whole.
There are currently few entry barriers for people to begin a token sale. In fact, token sales can be established simply by drawing up a white paper, designing a simple landing page, and collecting funds via a digital wallet.
A growing number of funds and private investors appear to have concluded that the return on Token Sale investments is worth the risk compared to traditional tools of investment, despite the recent market volatility. Even early naysayers such as George Soros (who called Bitcoin a ‘bubble’) have indicated that they are also likely to enter crypto markets in the near future.
Conversely, Warren Buffett and JPMorgan’s Jamie Dimon have unequivocally said they will not invest in cryptocurrencies, while Wall Street heavyweights Morgan Stanley and Goldman Sachs have been open to clearing bitcoin futures. Mixed messaging from such stalwarts of the financial industry contributes to investor unease and highlights the patent need for regulation of the industry.
Technology will play a key role in facilitating Token Sale compliance and harmonising this growing industry. This will, in turn, provide investors with the transparency and accountability they require to expand their portfolios into this area.
Technological advances are striding ahead of regulations being issued by government agencies. In the meantime, Token Sales will be keeping a watchful eye on emerging regulatory trends and adapting their governance and technology frameworks to include new compliance requirements.
Shane Brett is CEO and co-founder of GECKO Governance – the first RegTech solution that will manage the ICO governance process from start to finish.