Say “Hallo, Welt” to the new “reversible initial coin offering:” German regulators have effectively approved an innovative upgrade to the structure of ICOs—that promises a safer way to support investors—via the blockchain.
Developed by Fabian Vogelsteller, the mind behind the original ERC-20 Ethereum standard, the rICO enables investors to reserve tokens during one phase of the offering, then buy them over time during a second phase. If for any reason investors decide they no longer want to support the project, they can return all tokens they have purchased so far and have their corresponding ETH refunded.
Vogelsteller initially broached the idea for reversible ICOs at Devcon in 2018.
The rICO test case
The first rICO will raise funds for LUKSO, an Ethereum sister network designed to make mainstream decentralized applications more usable for creators and trend-setters. That rICO is set for next month, which prompted Vogelsteller to publicize an interchange he had with Bankfin, the German equivalent of the SEC. Vogelsteller had asked the regulator for a ruling on whether rICOs were legal.
On January 31, he received a reply saying that its approval wasn’t necessary—which is as good as approval, Vogelsteller said.
“Actually the regulators really like it because the whole point of what they are doing is trying to keep people safe, right? And then I come up with an idea that does this by design,” Vogelsteller told Decrypt.
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The new standard is built to increase investor protection and involvement in understanding a given project, while reducing fear of missing out (FOMO) and giving true believers incentives to monitor developers and their progress over the course of several months.
The rICO was inspired in part by Vitalik Buterin’s proposal for a “DAO like ICO” that would allow DAO participants to vote on milestones and continued funding for a project. Several proposals emerged in the wake of the 2017 ICO craze that saw significant scrutiny and sparked enforcement actions by the US SEC.
The rICO simplifies this design in an effort to address potential issues with low voting participation experienced by DAOs. Participants in an rICO are only responsible for their own investment, and have the choice to revoke it at any time unilaterally. In his Medium post, Vogelsteller proposed a design with a commit phase where participants reserve their tokens lasting one month, and a “buy” phase where tokens are bought gradually over time, lasting eight months.
What German regulators think
German regulatory authority BanFin has for some time been at the forefront of tokenized asset sales, beating US regulators to the punch when they approved the county’s first security token offering (STO) in January 2019.
“The interesting thing is that they actually mentioned in the [approval] letter that as long as the smart contact doesn’t give us ownership on our side before the user actually buys [tokens] over time, it’s fine,” Vogelsteller said. “In my opinion, that’s probably the biggest statement from a regulator so far. In a way, they acknowledge code as law, which is a big deal.”
Germany is Europe’s largest economy. While it’s not yet clear if all regulators elsewhere will be as eager as BanFin to approve the new fundraising mechanism, the rICO represents an important step forward in applying protections for investors directly within smart contracts. Such developments will only grow in importance as regulators and legacy institutions grapple with how to integrate cryptocurrencies and blockchain into the broader economy.