Crypto currencies, Initial Coin Offerings (ICO) under SEBI lens

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Context:

  • The rising popularity of crypto currencies and the increasing number of entities looking at raising funds through Initial Coin Offerings (ICO) has caught the attention of the capital market regulator, which is evaluating whether such instruments and offerings can be brought under its regulatory purview.  
  • The Securities and Exchange Board of India (SEBI) is mulling whether an ICO can be regulated under the existing legal framework or certain amendments would be required in case the government wants the capital market watchdog to be the regulatory authority for such issuances.
  • Incidentally, crypto currencies like bitcoin, ethereum and such offerings have been under government radar for long and discussions have been held between various bodies, including SEBI and the Reserve Bank of India (RBI), on the possible ways in which this segment can be regulated.
  • The central bank is of the view that these instruments are securities and so SEBI should be the regulating body.

Initial Coin Offerings (ICO)

  • ICO is an unregulated means of crowd funding for project via use of cryptocurrency such as Bitcoin, Ethereum, Monero, DASH, Litecoin, Z-cash etc.
  • It is like an equity initial public offer (IPO) where right of ownership or royalties of project is offered to investors in form of digital coins in exchange for legal tender or other cryptocurrencies.
  • ICO is mostly used to raise funds by start-up firms dealing in block chain technology and virtual currencies.
  • Unlike an IPO, which is governed by SEBI regulations, there is no regulator for this kind of crowd sourcing in India.
  • China’s Central Bank recently had banned ICO as dubbed it as an illegal public finance mechanism used for issue of securities and money laundering.

What are cryptocurrencies?

  • Crypto-currency is a digital currency that allows transacting parties to remain anonymous while confirming the transaction is valid.
  • These digital payment systems are based on cryptographic proof of the chain of transactions, deriving their name, Crypto currency.
  • These employ cryptographic algorithms and functions to ensure anonymity (privacy) of the users (who are identified by an alphanumeric public key), security of the transactions and integrity of the payment systems.
  • “Decentralised Digital Currency” or “Virtual Currency” is also interchangeably used for a crypto currency.
  • It is not owned or controlled by any institution – governments or private.
  • There are multiple such currencies — Bitcoin, Ethereum and Ripple are some of the popular ones.
  • Crypto-currency can be used for a lot of legal activities — such as booking tickets, buying coffee or fast food, depending of which retailers accept such currency.
  • The valuation of the crypto currency Bit coin founded a year later would surge to 2300 USD a unit in less than a decade.

Source: TH & Wiki