There’s also a general misconception among investors and companies that ICOs are not regulated already, according to David Tee, chief financial officer at Hong Kong-based fintech firm ANX International. As a result, he said, many of the ICO campaigns are being done with little or no professional or technical guidance. That likely results in misleading information and unfair sales processes, inappropriately designed token features and poorly written smart contracts that are vulnerable to hacking.
That all, of course, raises the question of why someone would be interested in buying into a poorly-considered ICO in the first place. For most, the answer is simple: They think there’s money to be made.
Tee, who is a banking industry veteran, explained to CNBC that digital tokens are a “representation of contractual rights in the form of an easily transferable medium.” He said those rights could allow for a variety of things, “or they may be rights to exchange the token for another asset, to receive future payments, or to share in revenues or profits of a venture.”
If the rights associated with the tokens fall in the latter category, most jurisdictions would consider them a security, “irrespective of whether that right is in the form of a digital token, a written contract or a formal security such as a share or debt instrument,” Tee said.
Currently, to get around regulatory scrutiny, many ICOs prevent residents from the United States and Singapore to participate in their token sales — either by blocking internet protocol addresses from those locations or by relying on self-declarations from the participants. But experts told CNBC that people are easily able to get around it by either using a virtual private network connection to mask their location or by simply asking a third party in a different place to participate on their behalf.
“Even though participating in an ICO might be forbidden to Americans or Singaporeans, there is nothing stopping them from purchasing those tokens on a public exchange — and doing so with a fair amount of anonymity to boot,” said Golden Gate Ventures’ Hall.