Proponents regard the latest internet fundraising mechanism, Initial Coin Offerings, a democratic leap forward in cutting out banks and governments in the quest for social change and innovation.
Sceptics regard most ICOs as scams, believing the unregulated terrain navigated by digital cowboys merely serves to enrich cryptocurrency speculators.
ICOs are big business overseas, raising US$2.3 billion in 2017 so far.
Australia’s market regulator is sufficiently worried about the associated risks to have issued a warning to investors.
Simply put, an ICO is a way to raise money for projects via the internet.
ICO investors send virtual currencies, such as Bitcoin or Ethereum, to a blockchain platform, and in return receive digital tokens related to the project.
The tokens can be then be used on that project – to buy and sell surplus solar energy, for example – or traded via cryptocurrency exchanges for other currencies such as Bitcoin.
A digital token is not the same as a share in a company since, in most cases, it does not come with ownership and legal protections.
Although they have been popular internationally, ICOs are relatively new in Australia, with the nation’s first ICO from Perth-based Power Ledger due to close on Friday.
Power Ledger, which launched last month and has already raised $17 million, is a renewable energy marketplace enabling households and community groups to trade surplus solar power over a blockchain network using POWR tokens.
Philippa Ryan, a lecturer in law, commercial equity and disruptive technologies at the University of Technology Sydney, says some ICOs like Power Ledger are a genuine attempt to deliver a positive social outcome.
“This is a community of idealists and they are all going to control the coin so that there is not going to be speculation,” she said.
“The cryptotokens will be valued as a means for trading in something for good.”
The Australian Securities and Investments Commission (ASIC) has released advice for consumers about ICOs on its MoneySmart website.
It warns computer hackers can steal the contents of a digital wallet, and said ICO operators can disappear after fundraising is over, giving investors little to no chance of getting their money back.
ASIC Commissioner John Price said ICOs are highly speculative investments, mostly unregulated, and there is a high chance investors will lose their money.
“Consumers should understand the risks involved, including the potential for these products to be scams, before investing,” he said.
Dr Ryan warned many international ICOs were scams, with some operators issuing large amounts of digital tokens to themselves and then trying to inflate the value of that virtual currency on a cryptocurrency exchange.
Many investors operate on the idea that the value of the digital tokens will grow on cryptocurrency markets rather than from any concrete outcome generated by the ICO.
“They’re a scheme or a scam; they’re a scheme at best and quite often a scam,” Dr Ryan said.
“Not one of the hundreds and hundreds of launches of these ICOs has actually translated into any kind of project.
“One hundred per cent of the actual activity in relation to the cryptotokens is everybody speculating in expectation that the value of it will increase and then they’ll sell it and they’ll make a quick buck – it’s a bubble.”
China recently banned ICO funding, while in Australia the ASIC earlier this month released guidelines to help ICO operators consider their legal obligations.