Digital currency sales take off, but with no regulation questions abound

Mon Dec 19, 2016 7:11am EST
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By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) - A small, but rapidly growing number of digital technology start-ups is raising cash by creating and selling their own currencies in offerings that bypass banks or venture capital firms as intermediaries and are outside the reach of financial regulators.

Investors are being drawn in on hopes that such "initial coin offerings" will match or exceed the performance of the first digital currency, bitcoin.

For the sellers, the appeal of selling their own currencies, or tokens, to raise cash is enormous. There is no paperwork as would be required for a public securities sale.

But the lack of regulatory oversight is raising red flags among some market experts and financial technology lawyers, some of whom even question the legality of the tokens.

Joe Zhou says he needed just 58 seconds to sell enough tokens to meet the roughly $5.5 million fund-raising target for FirstBlood, the online gaming website he co-founded.

"We had expected the sale to run for a month and we even gave the people who participated early-bird discounts because we were not sure how it would go," Zhou said.

The tokens sold by FirstBlood, like those sold by other companies, are the currency required to play games on the platform, for instance, or claim rewards for referrals.

For FirstBlood, a distinct advantage to having its own currency was to give gamers complete control over their funds, with no intermediaries such as banks involved, and with encryption features protecting against hacks.   Continued...

A Bitcoin (virtual currency) paper wallet with QR codes and a coin are seen in an illustration picture taken at La Maison du Bitcoin in Paris, France, May 27, 2015.  REUTERS/Benoit Tessier/File Photo