In 2017, startups in Central and Eastern Europe (CEE) accounted for a staggering 20 percent of total ICO funds raised internationally. 2018 saw ICOs account for 16 percent of all forms of startup funding in Europe.
However, market conditions took an unfavorable turn for ICOs in 2018. The bear market in the cryptocurrency sector had a dampening effect on those that had issued an ICO. Most ICOs relied on investors in Bitcoin or Ethereum. As a consequence of the dramatic drop in cryptocurrency prices, startups holding these cryptocurrencies saw the value of their capital suddenly plunging, too. As a result, startups ended up with significantly less capital than they had originally envisaged.
Another aspect which affected this dramatic dip was a lack of regulatory clarity. There has been insufficient certainty with regard to the rules as they apply to initial coin offerings up until now.
A key regulatory stance was taken last November by the Securities and Exchange Commission (SEC) in the U.S. The body issued a statement on digital asset securities issuance and trading that caused some consternation for all companies involved with ICOs. It took action against two companies on the basis that their ICOs were not in compliance with U.S. securities law. In this particular case, the reach of an ICO in terms of expanding the pool of potential investors has been its Achilles heel.
In the CEE region, there is equally much uncertainty in other jurisdictions in relation to ICOs and how they are viewed in terms of securities laws. As a consequence of the SEC’s action, Budapest-based startup, Inlock, had to pause its token-sale plans as the company reviewed the legality of the offering. When it eventually held the sale, the fallout from the SEC’s stance, together with a further market downturn meant that the company was left with unsold tokens after the ICO.
Recent months have seen many industry commentators claim that the ICO market is dead. However, it would seem that it’s more likely a temporary pause.
A key argument for those in favor of reviving ICOs is that regulation is simply outdated. Many believe that cryptocurrencies and ICOs should not be subject to securities laws that date back decades before the technology was conceived. Consequently, a number of proposals have emerged to exempt cryptocurrencies and token offerings from existing regulations.
In the meantime, CEE entrepreneurs should not simply overlook ICOs when planning how to finance their startups. However, that consideration needs to be deeply thought through.
Because of their novelty, ICOs are innovative but still risky. Given the extent of the factors implicated by the process – from the legal and regulatory to governance – and noting that market conditions may not always be favorable, it’s a decision that cannot be taken lightly.