(1) From debt and stocks to tokens

The new financing based on tokens is different from traditional trading models.

First, there are differences in how to allocate the creditor rights of entrepreneurs. The traditional capital market requires business owners to segregatetheir rights to company assets in the form of contracts while ICO can retain economic ownership and legal control.

Second, the sources of value are different. The stock price should reflect the net present value of the legitimate rights and interests of the company’s expected future cash flow, while the pricing of cryptoassets reflects the balance between the demand and the supply of tokens.

Third, the infrastructure of the capital market can be reviewed in an established way, guaranteeing the transaction and liquidity. In contrast, the cryptocurrency market is emerging, and its participants only have experience of a few years or months. Besides, there is no Wall Street investment bank to support ICOs. However, in fact, many investors believe that the lack of specific regulations and intermediaries for ICOs is its feature instead of a loophole.

Finally, for lawyers, ICO expands the role of computer code in managing transactional relationships. Traditional capital market transactions are largely constrained by laws and regulations, contracts and social norms. ICO transactions enhance (or even replace) these financial service intermediaries by embedding controls in smart contracts with effective rules. At the same time, it also creates new roles for lawyers and other legal practitioners.

(2) Understanding cryptocurrency

The concept of ICO started with cryptocurrency(digital coins and symbols) in the operation center. Like physical currency, the cryptocurrencyis scarce, and the control over it is transferable. However, although physical coins are transmitted face-to-face (or through humans and machines), changes in the control of cryptocurrencyneed to be implemented through the carrier of the network (through the transmission of digital keys). A cryptocurrencyis nothing but an entry on a distributed ledger, which specifies that a specific user identified by a certain “private key” (essentially a specific password) is theonly subject who is able to exercise a set of discrete powers associated with the distributed ledger. Although their private keys may be transmitted directly in the physical world, the actual cryptocurrencyis destined to be only a general ledger, locked in its local protocol forever.

The history of cryptocurrencybegan with Bitcoin and Bitcoin distributed ledgers (also known as “blockchains”). Before the advent of currency, money existed not in physical form (such as coins or paper money), but in the form of a ledger of a centralized intermediary. Bitcoin is the first important digital currency system that does not require a centralized intermediary to maintain proper account books. The key to the design of the distributed ledger and public blockchain system is how it maintains a reliable record of ownership. The Bitcoin ledger is not concentrated in one company but is copied and broadcasted through a computer network with the Internet. These computers are called “nodes”. When a Bitcoin holder broadcasts to a node to transmit Bitcoins to another user, the transaction subject does not need to rely on the credibility of any actor in the system to properly modify its copy of the ledger. Instead, they rely on economic incentives and code-based management to control nodes, ensuring that all copies of the ledger are updated equally.