What was the First ICO?

Token Sales

What Was The First ICO?

Within a short span of three years, initial coin offerings, or ICOs, have exploded in popularity. The total funds raised by ICOs between 2014 and the end of 2016 was $295 million, according to Coindesk. By the end of 2017, that number had ballooned to $5.6 billion, according to Token Data. Those figures are a far cry from 2013, when the first ICO was held.

Early on, ICOs were primarily popular among niche investors who saw a clear market opportunity for crypto and blockchain-based ventures. While there is still little historical clarity regarding the first ICO, the general consensus is that Mastercoin was among the first ICOs — if not the actual first — to take place.

Mastercoin’s ICO

The concept for Mastercoin, a coin that leveraged Bitcoin’s network was first proposed by developer J.R. Willett in a January 2012 white paper. Willett proposed a protocol layer built on top of Bitcoin’s blockchain to “consolidate” the message of cryptocurrencies to the world. He claimed that Mastercoin would solve two of the biggest barriers to widespread Bitcoin adoption: instability (in Bitcoin’s price) and insecurity (about Bitcoin’s price). “We use Bitcoin like email uses the underlying layer of TCP/IP,” Willett told Forbes, explaining that he intended to use Bitcoin’s blockchain to store digital contracts.

The white paper also describes a “trusted entity” for distribution and management of the protocol. The entity would be responsible for allocating funds to various business activities, such as marketing, software development and legal costs. The white paper also states that the entity should “commit” to financial transparency and undergo regular audits. As incentive, the entity would be given a financial stake in the new protocols to ensure that its interests are aligned with those of early adopters. The “entity” can be thought of as a precursor to the foundations that govern a cryptocurrency’s activities.   

Along with these benefits, Willett also listed two points that, in today’s parlance, would qualify the offering as an ICO for a security token. First, he said the offering would help set up a foundation and provide initial funds to hire developers. Second, he said the offering would “richly reward” investors and adopters of the new protocol.

Both those points satisfy criteria defined in the Howey Test, which is used by the SEC to determine whether a given token is a security or not. The test evaluates tokens on the basis of three criteria — establishment of a common enterprise, expectation of profit and use of a third-party in order to promote the enterprise. By mentioning rich rewards for early adopters of the new protocol, Willett set up an expectation of for future profits for them. The use of a foundation to help oversee development and promotion of the protocol meant that it was a third party responsible for promoting the offering.

More recently, entrepreneurs have been reticent about discussing future profits from their tokens for fear that it will lead to their tokens being categorized as securities and inflate costs. Willett, however, did not have any such misgivings. “Modest success of this protocol could make early investors (and even those who simply hold Bitcoins) very rich, hopefully, without much disruption to the rest of the world,” he wrote in the “Moral Issues” section of the white paper.

Still, Willett provided ample warning. “Please consult your financial adviser before investing in ANY wild scheme, such as this,” he wrote. “Anyone who puts their rent money or life savings into an experiment of this type is a fool, and deserves the financial ruin they will inevitably reap from this or some other risky enterprise.”

Mastercoin was launched on July 31, 2013. Anyone could buy Mastercoins by sending their Bitcoin to a blockchain address provided by Willett. The project collected 5,120 BTC, worth almost $500,000 at the time. But Mastercoin mostly traded in an illiquid market and pivoted to providing business services to companies interested in launching their own cryptocurrency.

In 2015, Mastercoin rebranded itself as Omni, a crypto 2.0 protocol on which notable projects, such as Tether — an alleged “stablecoin,” ostensibly tethered to the U.S. dollar — were built. It is currently traded on multiple exchanges. As of this writing, Omni has a market valuation of $1.2 million and is trading at a rate of $2.29 per coin. Mastercoin debuted in cryptocurrency markets at a price of $187.13 per coin.

Bitcoin Was Not an ICO

Bitcoin’s status as the original cryptocurrency means that the success of ICOs has spotlighted its rise to prominence. But there was any offering in the case of bitcoin. Its use and proliferation through the ranks of crypto enthusiasts was organic.

When it was first launched, Bitcoin had aspirations to become a medium of exchange for online transactions. Therefore, it was necessary for the cryptocurrency to gain a wider audience. It adopted unique distribution mechanisms in order to accomplish this goal.

Miners were among the earliest beneficiaries of an increase in Bitcoin’s price. Bitcoin’s novelty and the prospect of future profits led to a surge of companies who set up mining factories to exploit economies of scale in mining the cryptocurrency. Most of these companies, which have reported considerable profits from the rise in Bitcoin’s price last year, are based in China, and earned the cryptocurrency through competition.

Trading Bitcoin through Mt. Gox, a Japan-based cryptocurrency exchange that crashed in 2014, was another entry. Gavin Andresen, a prominent Bitcoin core developer, set up a Bitcoin faucet to hand out five BTC to anyone who gave him their address on Bitcoin’s blockchain. Each of these efforts was unconnected to the other. A Bitcoin Foundation was set up to promote Bitcoin but it closed when funds ran out.

Bitcoin has been cleared by regulators of security status. Earlier this year, SEC officials, who have mostly remained tight-lipped regarding the legal status of coins and tokens, clarified that Bitcoin was not a security. “Bitcoin is used as a medium of exchange, you are not looking at the efforts of others to increase your return and that’s why it looks much more like a currency than a security,” said SEC Chairman Jay Clayton.

Ethereum Was Not the First ICO

ICOs are generally associated with tokens built on Ethereum’s blockchain, a historic improvement on Bitcoin’s network. This is because the blockchain enables execution of smart contracts that streamline coin-offering tasks. Given the popularity of Ethereum’s blockchain, it would be natural to assume that Ether, Ethereum’s cryptocurrency, was the first coin offering. That’s not the case.

Ether’s offering was held in 2014, a year after Mastercoin, and it took in a total of $15 million during the first round. Technically, the offering satisfied the three criteria used in the Howey Test to deem a token offering as a security. In this case, the common enterprise consisted of developers and investors contributing to the effort while the Ethereum foundation was the third party used to promote Ether. In the ICO’s whitepaper, the authors also stated that earlier buyers would “benefit” from larger discounts in Ether’s price.

They also stated that for-profit entities would be created using Bitcoin from the sale. “The BTC received from the sale will be used entirely to pay salaries and bounties to developers and invested into various for-profit and non-profit projects in the Ethereum and cryptocurrency ecosystem,” the paper states.

Over the years, there has been considerable controversy regarding Ether’s status as a potential security token. Proponents of the cryptocurrency argue against the classification, maintaining that Ethereum was a decentralized system and that no single party benefited from an appreciation in Ether’s price. Critics point to the role of Ethereum’s foundation in promoting Ether’s ICO and subsequent use as “gas” for smart contract transactions.

Earlier this year, SEC Commissioner William Hinman provided some clarity. According to him, the Ethereum network had become “sufficiently decentralized” for Ether to not be considered a security. But the SEC’s statements do not let other tokens off the hook — SEC Chairman Jay Clayton has notably said that every token offering he has seen, so far, has in fact been a security offering. 

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