Initial Coin Offerings (ICOs) have exploded in 2017 despite the debate among market regulators and financial players over how to regulate this new financial instrument. The issue of coins or tokens generated from “mining” blockchains is now en vogue, and Russia has immersed itself fully in the ICO frenzy. It is positioning itself as a leader in the legalisation of blockchains and virtual currencies in the global arena.

Over the last twenty years, the financial technology (fintech) market has witnessed a sequence of disruptive innovations, which revolutionised the ways of getting money from a business.

In 1999, the world reached an Initial Public Offering (IPO) record: the 546 IPOs issued raised more than $69bn, driven by the skyrocketing demand for Internet-related company stocks.

Then in 2009, Satoshi Nakamoto released the first version of the Bitcoin software. In 2015, Vitalik Buterin’s Ethereum platform went live, thanks to the $2.3mn gathered in the previous 2014 token sale. And 2017 is proving to be the year of ICOs, with at least 400 ICOs conducted as of the start of October 2017 and several expected in the last quarter of this year.

Investopedia defines ICOs as “unregulated means by which funds are raised for a new cryptocurrency venture.” Startups have been using ICOs to overcome the strict and regulated capital raising process required by venture capitalists or banks. In an ICO campaign, a percentage of the cryptocurrency is sold to early backers of the project in exchange for cash or other cryptocurrencies, most frequently for Bitcoin or Ethereum.

The sharp rise of ICOs has sparkled a debate between players in the financial markets because of security issues: a significant percentage of ICO-related frauds and scams have led entrepreneurs, venture capitalists and public authorities to become very nervous about token sales.

In a statement issued on September 12, the Financial Conduct Authority (FCA), the UK market regulator, declared that “ICOs are very high-risk, speculative investments,” and that, “you should be conscious of the risks involved and fully research the specific project if you are thinking about buying digital tokens. You should only invest in an ICO project if you are an experienced investor, confident in the quality of the ICO project itself (e.g. business plan, technology, people involved) and prepared to lose your entire stake.”

Likewise, in September both China and South Korea outlawed ICOs on the ground that they do not wish, “money to be flooded into a speculative and unproductive direction”. The US Securities and Exchange Commission (SEC), the Singapore Monetary Authority (SMA) and Hong Kong’s Securities and Futures Commission (SFC) have made recommendations, but have not yet taken a definitive position. Russia is also studying the issue and working on draft legislation to improve investor protections, but has embraced the technology wholeheartedly.

Russian businessmen have developed some of the most successful ICO projects. The mobile games platform MobileGo raised over $50mn, and the ICO tokens platform Waves, owned by Muscovite cryptocurrency guru Sasha Ivanov, raised over $16mn.

On the other hand, the Central Bank of Russia (CBR) has been very reluctant to promote ICOs. In a notice issued on September 4, the regulator stressed the “high risks” of exchanging cryptocurrencies and participating in ICOs.

“Given the high risks of circulation and use of cryptocurrency, the Bank of Russia considers it premature to admit cryptocurrencies, as well as any financial instruments nominated or associated with cryptocurrencies, to circulation and use at organised trades and in clearing and settlement infrastructure on the territory of the Russian Federation for servicing transactions with cryptocurrencies and derivative financial instruments on them,” the CBR said in its note.

However, the position of the CBR did not stop enthusiasm for Bitcoins growing and the legalisation of the token sales, nor are its comments legally binding: in the Russian Federation, the Ministry of Finance serves as the market regulator in the last instance. Furthermore, in the last few months there has been a steam of favourable statements on the introduction of a regulatory framework for ICOs.

At the end of August, Russia's Deputy Minister of Finance Alexei Moisseev welcomed the idea of getting a cryptocurrency testing platform at the Moscow exchange running by early 2018. He added that only qualified investors will be allowed to exchange in cryptocurrency in order to ward off large money laundering operations. The deputy minister clarified that the authorities “really need to be able to track deals and transactions in these currencies”.

Likewise, in a July letter to CBR head Elvira Nabiullina, the politician and presidential commissioner for entrepreneurs’ rights Boris Titov called on Russian banks to get inspired by the Japanese model by introducing a regulation on cryptocurrencies such as Ethereum and Bitcoin and to categorise them as a means of payment rather than as money.

There has been a clear and significant shift in the perception of cryptocurrencies in Russia over the last year: Russian institutions have indeed moved from a total rejection of ICOs and a strict enforcement policy against the rise of ICOs to promoting the legalisation of ICOs and their admission to the Moscow Stock Exchange, the country’s main trading hub.

The next ICO will come in October. Vladimir Smerkins is the co-founder and managing partner of The Token Fund, a token exchange platform, which has scheduled the launch of its own ICO for October 24.

Smerkins says: "First of all the legalization of the crypto-currency transactions will create an additional source of income to the state budget through taxation. Apart from that crypto market opens extra opportunities in finding sources of financing. By means of ICO enterprises in the open market receive the direct access to investors from the global stage, which would enable them to receive additional capital".

The additional economic benefit is represented by the multiplication of the possibilities in finding sources of financing. If ICOs are legalised, enterprises in the open market will be granted direct access to investors from the global stage, which would enable them to receive additional capital.

Furthermore, if enterprises are allowed to exploit distributive registers, such as blockchain-based data registers, to record transactions, they will be able to cut the number of intermediaries and so reduce costs while increasing transparency at the same time.

Russia has taken the line that “if the revolution is inevitable, it must be led”. And Russia knows a thing or two about revolutions.

Ilaria Capitanio is the communication officer at D&D Consulting Services