Question

Describe briefly what an ICO is and then discuss the dematerialised custodianship of securities of Bitcoin or ICO tokens. What measures do financial authorities, regulators and financial exchanges take to reduce counterparty risk in established marketplaces? How is this different with Bitcoin?

Answer 1

An ICO can be defined in following ways :

An unregulated means by which funds are raised for a new cryptocurrency venture. An Initial Coin Offering (ICO) is used by startups to bypass the rigorous and regulated capital-raising process required by venture capitalists or banks. In an ICO campaign, a percentage of the cryptocurrency is sold to early backers of the project in exchange for legal tender or other cryptocurrencies, but usually for Bitcoin.

BREAKING DOWN 'Initial Coin Offering (ICO)'

When a cryptocurrency startup firm wants to raise money through an Initial Coin Offering (ICO), it usually creates a plan on a whitepaper which states what the project is about, what need(s) the project will fulfill upon completion, how much money is needed to undertake the venture, how much of the virtual tokens the pioneers of the project will keep for themselves, what type of money is accepted, and how long the ICO campaign will run for. During the ICO campaign, enthusiasts and supporters of the firm’s initiative buy some of the distributed cryptocoins with fiat or virtual currency. These coins are referred to as tokens and are similar to shares of a company sold to investors in an Initial Public Offering (IPO) transaction. If the money raised does not meet the minimum funds required by the firm, the money is returned to the backers and the ICO is deemed to be unsuccessful. If the funds requirements are met within the specified timeframe, the money raised is used to either initiate the new scheme or to complete it.

Differnce between bitcoin and ICO

Bitcoin is the first crypto currency token which caught everyone’s attention. Coin and token are words used interchangeably in crypto world.

ICOs are intial coin offerings which introduce a coin to the market , and the money from buyers funds the project.

CO: new projects sell their underlying crypto tokens in exchange for bitcoin, ethereum,litecoin and other coins. (PS: It’s similar to an Initial Public Offering (IPO) in which investors purchase shares of a company.)

Tokens: are created and distributed to the public through an Initial Coin Offering (ICO), which is a means of crowdfunding, through the release of a new cryptocurrency or token to fund project development.tokens operate on top of a blockchain that facilitates the creation of decentralized applications.

bitcoin is a cryptocurrency. every cryptocurrency undergoes ICO Stage as a token before becoming a coin.

What measures do financial authorities, regulators and financial exchanges take to reduce counterparty risk in established marketplace

A first measure to reduce counterparty risk is to consolidate the exposure under the various transactions entered into with a particular counterparty through the use of a close-out netting mechanism. This can be achieved by entering into a master agreement with each counterparty, providing for appropriate netting arrangements such as the International Swaps and Derivatives Association (ISDA) master agreement, the Swiss master agreement for OTC Derivatives or similar international (eg, the European master agreement (EMA) sponsored by the European Banking Federation (EBF)) or national master agreements. As a result of such netting provisions, if certain events occur which are highly likely to undermine the counterparties' financial health and thus their ability to fulfil their obligations, these agreements provide for the consolidation and conversion of multiple obligations between two parties into a single net obligation

Custodian

it is a financial institution that holds customers' securities for safekeeping to minimize the risk of their theft or loss. A custodian holds securities and other assets in electronic or physical form. Since they are responsible for the safety of assets and securities that may be worth hundreds of millions or even billions of dollars, custodians generally tend to be large and reputable firms.

A custodian is a person or entity selected to hold and protect customer funds or investments through either direct or indirect means. Additionally, a custodian may have the right to assert possession over the assets if required often in conjunction with a power of attorney. This allows the custodian to perform actions in the client's name, such as making payments or changing investments.

Qualified Custodian

In cases where investment advisors are responsible for customer funds, the advisor must follow custody rules set forth by the Securities and Exchange Commission (SEC). The person or entity must be considered a qualified custodian, often limiting the options to banks, registered brokers, registered dealers, and certain other individuals or entities.