Blockchain, Cryptocurrency and ICO
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It has been a decade since Bitcoin was introduced and we are continuing to see the rapid increase of cryptocurrencies throughout Australia and around the world. Unfortunately, legislation and regulation surrounding blockchain, cryptocurrency and ICOs remains mostly undefined and unregulated due to the sudden emergence of such technologies.
WHAT IS BLOCKCHAIN AND HOW DOES IT RELATE TO CRYPTOCURRENCY?
Blockchain technology can be explained as a series of data blocks connected by a cryptographic hash which, in turn, forms a decentralised, digital database. The use of cryptographic hashing gives blockchain its unique ability to turn a data block into any length of a random fixed-length output by using an algorithm. Each data block will always include the hash of the previous block which allows the data blocks to form a continuous chain, making it decentralised, accessible, and dependable.
While cryptocurrencies may use alternative technologies, blockchain forms the foundation for the majority of cryptocurrencies as it permits them to operate in a decentralised and secured system. Without such securities, cryptocurrency would not be possible.
WHAT IS CRYPTOCURRENCY?
Cryptocurrency is the term used to describe digital currency as opposed to fiat currency. It uses digital tokens which, much like actual coins, allows individuals to make payments to each other through an online system. As cryptocurrencies do not have any legislative value, what a cryptocurrency is worth is often the value equal to whatever individuals are willing to pay for such digital tokens. The most well-known cryptocurrency is Bitcoin which has seen massive fluctuations in its value over the years.
Digital tokens of cryptocurrencies are what is used to trade in Initial Coin Offerings, otherwise known as ICOs.
WHAT IS ICO?
ICOs are essentially cryptocurrency’s version of crowdfunding. It allows individuals or companies to raise a large amount of money from the public for expenses in relation to a particular project or product development. By selling or issuing digital tokens in this method, individuals or companies may acquire them for almost any value depending on the ICO and the nature of the product or project that the ICO is raising funds for.
WHAT IS THE DIFFERENCE BETWEEN AN ICO AND AN IPO?
One of the main differences between ICOs and IPOs is that ICOs have fewer regulations and therefore, are far less expensive and are a lot faster to complete.
You will be able to conduct an ICO if the money raised is done by issuing tokens that do not give the holder any voting or equity rights. However, to conduct an ICO, you will need a white paper.
IPOs will be conducted where you are raising money by issuing shares or tokens which resemble shares. In these cases, you will need a prospectus.
WHAT IS WHITE PAPER?
White paper refers to the main document which is required to launch an ICO. It will outline the details of the company, what issue it is attempting to solve by raising the funds, and the solution that it proposes to resolve the issue. ICOs are more likely to have greater success where a white paper is well-drafted. Therefore, we always recommend seeking advice from one of our solicitors who will be able to assist in forming your white paper.
CURRENT REGULATION OF ICOS IN AUSTRALIA
At the present, there is no detailed regulation in Australia that regulates the use of ICOs. ASIC does touch upon the use of cryptocurrencies in its publications however, it has not explicitly stated whether such publications are aimed to regulate ICOs. It is not yet confirmed whether ASIC will regulate ICOs but an announcement is expected shortly.
Both cryptocurrencies and ICOs present exciting opportunities for entrepreneurs and start-ups but these opportunities are accompanied by new and everchanging regulations. Therefore, we recommend that you seek advice from one of our expert lawyers who will be able to guide you through the process. Particularly where such regulations do not presently exist as it is often a risk to participate in such activities as the law will not afford or extend its protection to areas in which it is not designed to protect.
Furthermore, if you are considering using an ICO to raise capital for your company, it is important to consider how tokens will be classified and the legal obligations which may arise as a result of such classification.
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