Emaar's Digital Currency: How Does An ICO Work?

An IPO, or initial public offering, offers a chance to make big money quickly by getting in on the ground floor of the next new Google or Facebook. An ICO, or initial coin offering, offers a chance to make big money quickly by getting in on the next new money.

What’s the goal of an ICO?

It’s a way to raise money for new ventures trying to follow in the footsteps of digital currency pioneers bitcoin and ether. Despite controversies arising from fraud, theft and volatile speculation, they and their imitators have shown that it’s possible to develop communities of users willing to try unconventional forms of money. An ICO lets startups bypass the venture-capital process by turning to something comparable to a Kickstarter campaign. Those putting up the money get access to technology companies that are usually the realm of only institutional or high-income investors. Plus, there may not be a need for an investor to wait years to cash in (as is true with most IPOs), so long as they can find a buyer for the coins they’ve bought.

How do these digital currencies work?

Most are made to be used as a means of exchange inside an application. Take Brave Software, which is developing a web browser in which readers are paid if they choose to view ads. Transactions will take place on a blockchain, the digital ledger technology first developed for bitcoin and popularized for other uses by Ethereum. Since you can’t stuff quarters into a blockchain, Brave created a unit of exchange that it dubbed a Basic Attention Token, or BAT, which is a digital currency issued by the company.

What do ICO investors receive?

They get a virtual credit or token, which can mean different things in different ICOs. For instance, the buyers of BATs can wait and use them on the Brave browser when the system is up and running. That kind of token, with a specific use in an application likely to attract users, is known as a utility token. Holders of tokens can hang onto them not to use but in the hope of capital gains -- betting that increased demand will lead to the kind of price rise seen by bitcoin, which this year hit a high of more than $6,000. The proliferation of ICOs untethered from concrete uses, and confusion over which type of offer is a token and which is a security, prompted the SEC to issue its guidance. Only one in 10 tokens issued is in use with an application it was intended for, according to Token Report.

How serious is the risk?

There’s certainly plenty of weirdness for potential investors to wade through. The long list of projects offering new currencies include ones endorsed by Paris Hilton and Floyd Mayweather, plus one to "help measure demand for synthetic rhino horn aphrodisiac pills."