FREQUENTLY ASKED QUESTIONS
If you've spent any time looking into ICOs before coming to our website, you've probably figured out that this is a relatively new and VERY complex and rapidly evolving space. That means it's exciting. But it also means that this new world of ICOs is also VERY risky. So, as those traffic signs say, PROCEED WITH CAUTION! New concepts, ideas and structures are being developed practically daily. New participants are entering the market, from the US and around the world. Investors looking for the "best new thing" are eagerly searching for new opportunities, and undoubtedly some purchasers have "stars in their eyes." And some entrepreneurs are viewing ICOs as the easiest way to raise a lot of money, quickly—even if they have no business and no assets yet, other than an idea, which may or may not be a good one, or even viable.
For all of the above reasons, we here at ICOInvestor.tv love this new space, and agree it is VERY exciting. But we also know it’s very risky. There have already been a number of well-publicized fraudulent ICO and cryptocurrency schemes, resulting in enforcement action by the US Securities and Exchange Commission, and private lawsuits, among other actions. That’s why we hope to provide you with useful, and current information on what’s happening in the ICO space, in the US and around the world. And we are still in the process of developing the most useful and relevant, for you, “Frequently Asked Questions.” [If you happen to have a question that’s bothering or puzzling you, especially if you have not found any answers anywhere else, please send us your question here.
So, as we launch our website today, November 8, 2017, the only FAQ we’re going to start with is our perspective on ICO Risk Factors. Please understand that the FAQ below should NOT be taken as a complete statement of ALL risks entailed with ICOs. Because this is such a complicated and dynamic space, you should consult with your own lawyer or financial advisor before wading in.
For definitions of words used in this FAQ, please see our “ICO Terminology” page. Q: What are some of the risk factors in purchasing Tokens through an ICO? There are several areas of risks associated with purchasing Tokens through an ICO. We’ve broken them down into sections
A cryptocurrency is a peer-to-peer, decentralized, digital currency utilizing principles of cryptography to validate transactions and generate the currency itself. An ICO token relies on a network protocol with similar principles to a cryptocurrency, but also serves other functions than merely storage of value. This novel complexity means the creation and usage of ICO tokens are not subject to a fully-developed set of regulatory and licensing requirements. However, they are subject to high levels of volatility and market abuse.
ICO tokens exist entirely in electronic form, as entries in digital ledgers. The ledgers themselves, as well as the private encryption keys used to access ICO token balances, are held on personal hard drives or third-party servers, making them susceptible to all of the risks inherent in holding any electronic data, such as power failure, data corruption, security breach, communication failure, and user error. Cryptocurrencies and ICO tokens are also vulnerable to theft, destruction, or loss of value from hackers and corruption as well as technology specific factors such as viruses that do not affect traditional currency underwritten by central banks and monetary authorities.
Transactions in ICO tokens are recorded and authenticated by a peer-to-peer network. While decentralization reduces the likelihood of certain threats common to computer networks (e.g., denial of service attacks), the peer-to-peer system relies on participants in the network having greater numbers and computing power than coordinated attackers. The burden on participants in the network to maintain higher numbers and computing power than attackers could increase if the popularity of the ICO tokens increases.
Transactions in cryptocurrencies and ICO tokens provide a high degree of anonymity, meaning they may be misused for criminal activities, including money laundering. This misuse could lead law enforcement agencies to close exchange platforms with little or no notice and prevent consumers from accessing or retrieving their funds the platforms may be holding.
Regulatory Environment Risks
The legal status of cryptocurrencies and ICO tokens is unclear. It may be illegal, now or in the future, to own, hold, sell, or use cryptocurrencies or ICO tokens in one or more countries, including the United States. The uncertainties surrounding the legal and regulatory requirements, potential accounting and tax issues, or other requirements relating to cryptocurrencies or ICO tokens pose additional risks to purchasers.
The development of the market for cryptocurrencies and ICO tokens globally is in relative “limbo” due to regulatory uncertainty. Because of the current lack of understanding on exactly how cryptocurrencies and ICO tokens should be treated, payment services incorporating cryptocurrencies and ICO tokens are limited and only available at the margins in the retail sector, predominantly in the United States.
Regulations and legislation, within the United States and abroad, regarding ICO tokens are underdeveloped and changing rapidly. Current and future legislation in the United States or abroad, rulemaking by the U.S. Securities and Exchange Commission (the “SEC”), the U.S. Commodity Futures Trading Commission (the “CFTC”), the U.S. Financial Crimes Enforcement Network (“FinCEN”) and other regulatory developments may impact the manner in which cryptocurrencies, ICO tokens, and their derivatives, are treated for classification and clearing purposes.
In particular, digital currencies or tokens may not be excluded from the definition of “commodity future” or “security” by the CFTC and SEC, respectively. The SEC recently communicated that it is actively reviewing the digital currency and token markets with a focus on enforcing existing regulation. Specifically, the SEC has confirmed that each digital currency or token would need to be evaluated on a case-by-case basis to determine whether or not it will be treated as a security. Moreover, if a specific currency or token is found to be a security, the SEC warned that all federal requirements relating to the offer and sale of securities still apply, regardless of whether the issuer is decentralized or autonomous or how the securities are purchased. The CFTC has held that at least some cryptocurrencies fall within the definition of a commodity under applicable law.
The Internal Revenue Service (the “IRS”) has only provided limited guidance regarding the tax treatment of ICO tokens. In particular, the IRS has determined that convertible virtual currencies generally should be treated as property for tax purposes. ICO tokens may share some features in common with the convertible virtual currencies described in IRS guidance, but may also differ in some respects. Any potential investor is urged to consult their own tax advisor with respect to the federal, state, and local income tax consequences of the purchase and ownership of cryptocurrencies and ICO tokens.
Unlike traditional or fiat currencies, ICO tokens are generally not subject to Federal Deposit Insurance Corporation (“FDIC”) or Securities Investor Protection Corporation (“SIPC”) protections.
Market Uncertainty Risks
Cryptocurrencies and ICO tokens represent a speculative investment and involve a high degree of risk. Cryptocurrencies and ICO tokens are part of a new and rapidly evolving industry. The growth of this industry is subject to a high degree of uncertainty. Some of the factors affecting the further development of this industry include:
- Continued worldwide growth in the adoption and use of cryptocurrencies and ICO tokens;
- Government and quasi-government regulation of cryptocurrencies, ICO tokens, and the related trading systems;
- Changes in consumer demographics and public preferences;
- The availability and popularity of other forms or methods of buying and selling goods and services, including new means of using fiat currencies; and
- General economic conditions and the regulatory environment relating to ICO token trading systems.
A significant portion of the demand for cryptocurrencies and ICO tokens is generated by speculators and investors seeking to profit from the short or long-term holding of such cryptocurrencies and ICO tokens. A decline in the popularity or acceptance of cryptocurrencies or ICO tokens could adversely affect the value of these cryptocurrencies and ICO tokens. Several factors may affect the price of such cryptocurrencies and ICO tokens, including, but not limited to:
- Total quantity of a certain ICO token in existence;
- Global supply and demand of a certain ICO token;
- Investors’ expectations with respect to the rate of inflation and deflation of fiat currencies, cryptocurrencies and ICO tokens;
- Interest rates;
- Currency exchange rates, including between ICO tokens and fiat currencies;
- Fiat currency withdrawal and deposit policies of the ICO token exchanges and liquidity on such exchanges;
- Interruptions in service from or failures of the ICO token exchanges;
- Theft, or news of such theft, of cryptocurrencies or ICO tokens from individuals or retail and service providers, including companies that buy, sell, process payments, or store cryptocurrencies and ICO tokens;
- Investment and trading activities of large investors, including private and registered funds, that may directly or indirectly invest in cryptocurrencies and ICO tokens;
- Monetary policies of governments, trade restrictions, currency devaluations and revaluations;
- Regulatory measures, if any, that restrict the use of cryptocurrencies or ICO tokens as a form of payment or the purchase of cryptocurrencies or ICO tokens;
- The maintenance and development of the open-source software protocol of ICO networks;
- Increased competition from other forms of digital assets or means of payments;
- Global or regional political, economic or financial events and situations;
- Expectations among cryptocurrency economy participants that the value of certain cryptocurrencies or ICO tokens will soon change; and
- Fees, including miners’ fees, associated with processing ICO token transactions.
Other Risks Because trading in cryptocurrencies and ICO tokens is currently largely unregulated, such trading may be more exposed to fraud and failure than trading in more traditional, regulated assets. If high volume cryptocurrency exchanges are involved in fraud or experience security failures or other operational issues, the value of cryptocurrencies and ICO tokens may be reduced. Cryptocurrencies and ICO tokens are controllable only by the possessor of unique private keys relating to the addresses in which the cryptocurrencies or ICO tokens are held. The theft, loss, or destructions of a private key required to access a ICO token is irreversible, and such private keys would not be capable of being restored. Any loss of private keys relating to digital wallets used to store cryptocurrencies or ICO tokens could result in the loss of the cryptocurrencies or ICO tokens.