The Malta Independent 22 September 2020, Tuesday

Capital markets – ICO versus IPO schemes

George M Mangion Tuesday, 10 December 2019, 10:20 Last update: about 11 months ago

In the race to catch up with the fast-growing crypto world, last year saw PKF executives taking time to learn the ropes and begin participating in international conferences while touring the crypto capitals of Amsterdam, Zurich, the canton of Zug, Estonia, Tokyo, Hong Kong and Shenzhen.

Our fact-finding expedition has borne fruit and we can now boast of a small but growing portfolio of entities active in the DLT area - which currently ranges from providers offering consultancy, to IT and  software architecture offerings, ICOs and crypto currency exchanges/hybrid platforms.


Readers may be excused for feeling confused about the fast-moving sector. This young industry is shrouded in mysterious jargon and some ask what the difference is between an IPO (Initial Public Offering) and an ICO (Initial Coin Offer).  In simple terms, an IPO is when shares in a company are sold to institutional investors and members of the public in the open market. An ICO is defined by Wikipedia as a type of funding that uses cryptocurrencies sold as 'tokens' or 'coins' to investors in exchange for a legal tender - or sometimes for other cryptocurrencies such as Bitcoin or Ethereum.

The tokens thus generated are promoted as future functional units of currency if or when the ICO's funding goal is met and the project described in the White Paper is launched. The curiosity behind the meaning of the two acronyms is heightened when one continuously comes across references to a successful IPO being launched on the international markets. It so happens that now is bonanza time for IPO, especially in the US where tech companies are the flavour of the month and there are many instances of biotech companies that have had no trouble raising capital in an IPO.

So what is the advantage gained from using the ICO system? It is because it allows companies to avoid some of the more complicated regulatory steps which are mandatory in the IPO route.

Reverting to the ICO sphere, one remembers the euphoria that gripped the news last year when the value of Bitcoin shot through the ceiling - almost touching $20,000. This year, the Bitcoin performance is more subdued as it has suffered from fluctuations of various highs and lows - exacerbating its volatility.

Sadly, such turbulence in the crypto market has resulted in a devastating loss of more than $26 billion where holders of Bitcoin (BTC) are concerned. The stability and growth of last year have not been repeated this year. The unforeseen decline in the price of BTC led other major cryptocurrencies and small market cap digital assets to initiate a steep downward movement and this has put a sting in the tail of ICOs.

Whether the good days of successful ICOs will return depends to a large extent on how investor sentiment and the risk profile reassesses the cryptocurrency exchange market. Can a period of low volatility prevail that will open the floodgates for new ICOs? Not so fast: one has noticed that - throughout the first two quarters of 2018 - tokens and similar digital assets recorded 40 to 80 per cent losses against BTC, which itself declined by around 70 per cent on its own. It is to be hoped that, for the sake of the sustainability of this nascent sector, a positive sentiment returns in the crypto market.

This is a desired prognosis for Malta which has been actively promoting itself via Government-sponsored Delta and Sigma mega conferences to place the island at the forefront as the ICO 'Queen of the Med'. The government has spared no effort or expense in attracting world attention to the fact that Malta means business and is friendly to the crypto investor techies who roam the world searching for a safe haven.

In order to properly regulate this sector, Malta was quick to promulgate three new laws. These came into force on 1 November 2018 and the regulator Malta Financial Services Authority has approved various service-providers who invested to become licensed as Virtual Financial Asset Agents. As a definition, it should be clarified that virtual financial assets are not virtual tokens (these are not subject to any regulation) nor even financial instruments (which are already subject to the existent MIFID2 framework) nor e-money (these are already subject to an existent E-money Directive). 

This fine distinction paves the way for proper identification of the asset class.  Having laid solid foundations for this sector, Malta has walked the extra mile to set up another new and innovative piece of legislation that provides for an ISO-type certification of DLT technology and innovative technology arrangements. A unique piece of legislation is the financial instrument test. This is a complex exercise that scares the wits out of the uninitiated since it is a densely structured checklist drafted by a cautious regulator and - for the most part - mirroring the powerful MIFID2 directive.

It is intended to ascertain whether the DLT asset in question is, in fact, a virtual financial asset as properly defined by the new legislation. As can be expected, the test itself is extremely detailed, lengthy and technical, and carries with it a high onus of responsibility and liability on the part of the legal advisor/VFA who ultimately signs it.

On a positive note, a great deal of publicity has been given to acquainting the international business community with the fact that Malta is open for ICO business and it is to be hoped that the seed will find fertile ground next year in a nursery hosting a healthy number of crypto exchanges and other DLT structures.

In conclusion, there is no magic crystal ball to predict whether an IPO will maintain its present supremacy as a vehicle for attracting capital when measured against the ICO in the crypto world. Only time will tell.

[email protected]

George Mangion is a senior partner of an audit and consultancy firm PKF, with over 25 years' experience in accounting, taxation, financial and consultancy services. His efforts have seen that PKF has been instrumental in establishing many companies in Malta and have placed PKF in the forefront as professional financial service providers on the Island.



  • don't miss