Initial Loan Procurements as Alternative to ICOs?

 In Innovation

Initial Coin Offering (ICO) and Initial Loan Procurement (ILP) are two ways in which blockchain developers raise funds for projects. While the goals of the methods of raising capital are similar, the form they take is quite different. The ICO process runs in an unregulated environment which allows startups to obtain capital by-passing the tightly regulated procedures required by banks or other venture capital providers. ICOs offer cryptocurrencies or tokens to investors who back their project, and receive in exchange, either fiat money or other cryptocurrencies, like Bitcoin, as investment capital.

Such investors are betting on the success of the venture with the hope of reaping a windfall when the token or cryptocoin appreciates in value after the project’s launch. Just a few short years ago, early investors who supported an ICO smart contracts project known as Ethereum saw the value of its coin, ether, shoot up from less than $0.5 to over $10 within a period of one year, and so investors do have a precedent for their expectations concerning ICOs.

Initial Loan Procurement method

An Initial Loan Procurement (ILP) is also a way of raising capital but differs in form from ICO in that ILPs do not raise capital through the sale of coins; rather ILPs use loans. With the ILP strategy, borrowers and creditors enter into agreements which are legally binding through smart contracts. Another difference is that money raised through the ILP process is considered a debt and therefore not taxable, while money raised by way of ICO is seen as income and therefore attracts taxes from revenue authorities in some countries.

ILP as an Alternative to ICO

The ICO method of raising capital has a number of weaknesses which make ILP a suitable alternative. The following are some of ICO’s shortcomings:

  • Tokens: ICO’s depend so much on sale of tokens which are not always in demand. Businesses which have no use of the tokens can save the time and energy that would ordinarily be spent on creating tokens, on something more productive.
  • Legal Environment: Some countries’ laws restrict or prohibit ICOs. China, through People’s Bank of China has termed ICOs a threat to financial and economic stability and slapped an official ban on them. The use of tokens as currency was also disallowed and banks were barred from handling any ICO related services. Other countries’ laws view ICO generated capital as income and may impose very high taxes on them.

The ILP method further qualifies as a better alternative because of the following characteristics which gives it an advantage over ICOs:

  • The ILP structure has a form which allows anyone in the world to participate in it.
  • Unlike what happens with many ICOs, ILPs operate under legal frameworks and participants are subjected to authentication processes which include submission of identification documents and their Ether address. Authentication is meant to avoid money laundering and fraud.
  • No transactions take place without secure, inalterable and legally binding agreements signed with creditors by use of blockchain technology.

The process of participating in ILPs is pretty straightforward too. After registration which includes authentication of each creditor, the creditor digitally signs the loan agreement and sends Ether to their account address from their pre-registered account. The contract is sealed once Ether is received in their account address. Among others, the loan agreement specifies the amount of interest which the creditor will receive annually from the venture. The creditor can also assign or transfer the debt to another person.

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