What is a PCO? (Protected Coin Offering)

A protected coin offering (PCO) is the latest creation in the evolution of cryptocurrency offerings. Its design may provide an additional layer of asset protection to crypto investments. Today, we explore this brand new term, its relation to ICOs and STOs and why or why not an investor may want to participate in a PCO.

To start the discussion, let’s recap what ICOs and STOs are to get a better context into how PCO’s work.

What is an ICO (Initial Coin Offering)?

An ICO refers to the Initial Coin Offering of a newly minted cryptocurrency to the public. This ‘offering’ represents the first time the public can buy a coin that is an inherent element in a blockchain-based startup. It’s similar to how an IPO works but with some significant differences. The biggest variance is that people who buy tokens during an ICO cannot expect a return on their investment. In fact, legally it’s not an investment at all.

ICOs that involve a token as a utility do not have to comply with the same regulations as with a security token. A security token signifies that the offering meets the Howey test by sharing similarities with other securities, thus they must be in compliance with the SEC. Not so with ICOs for utility coin offerings. From here on, when we refer to ICO, it’s in the capacity as a utility token.

Those who buy tokens through an ICO are not supposed to expect a return, dividend, or any type of share in the business. Though, many startups in less regulated or self regulated regions have done just that. Instead, they may use the tokens to interact with the new platform the new startup is rolling out.

The new cryptocurrency, that they buy at a discount during the ICO may give them access to a new platform or allow them to use a particular service. Whereas IPOs offer a share in a company to the public, ICOs offer a ‘way in’ to a blockchain ecosystem or decentralized application (DApp)

After the ICO

However, most of the ICOs that survived the bear market ended up creating cryptocurrencies that do indeed act like a tradable asset. They are often listed on numerous cryptocurrency exchanges after the ICO is complete. From that point, the value is dependent on many things, including the starting token price, the use cases for the token, the volume of trading for that token, and the viability of the business who issues it.

So those who did buy at discounted prices during the ICO certainly are hoping for the value to increase. As far as regulators are concerned, participating in an ICO does not mean investing, because that implies the hope for future returns. Many ICOs actually operate as though they are creating an investment vehicle. But countries such as the US and Canada ban them from marketing and making available their offering to citizens in their jurisdictions.

ICOs are like decentralized versions of IPOs for multiple reasons, including:

  • They offer cryptocurrencies that represent the fuel for their new application.
  • By being decentralized in nature, they offer enhanced security.
  • They’re open to anyone regardless of geographic restrictions (unless crypto is illegal in a certain country) or investment restrictions. You don’t have to be an accredited investor to participate.
  • The barrier to entry for companies wanting to hold an ICO is very low. Compliance to security regulations is not necessary since the ICO is not an ‘investment’ like stocks.

What is an STO (Security Token Offering)?

An STO has many similarities to the ICO. The major differences are:

  1. The cryptocurrency that people buy during the public offering is backed by a real asset such as the US dollar or real estate. With an ICO the token is not backed by anything.
  2. Participation in the STO entails an investment in a security. Investors expect and hope that the value of the token will increase from the original token offering price. STO participants are dealing with an investment product as opposed to a utility product with ICOs.
  3. Because STO involves securities, companies that hold STOs must be fully compliant with securities regulations.

For more information on ICOs and STOs, check out our article here.

Now that we’ve covered the basics on ICOs and STOs, we can gain some perspective on Protected Coin Offerings.

What are PCOs?

The first time PCOs were ever mentioned was in a Forbes article in March of 2019. The topic of the article was blockchain security and it started off by explaining the differences between blockchain types.

Later in the article, there was a discussion about security issues (like hacks) surrounding cryptocurrencies and public coin offerings. They also mentioned a solution that was created by Philippe Bednarek, CEO of GoldFinX. In their coin offering, they decided to call it a PCO, or protected coin offering.

How do PCOs work?

Basically, it will work just like an STO except, as Bednarek explained, an extra layer of security accompanies this security in case of a worst-case scenario, such as a hack. This extra layer further secures the asset with a physical reserve of assets, in this case, gold.

Bednarek’s GoldFinX project is a financing startup for smaller gold miners. The financing would include payment in the gold that is mined. Then, this gold would accumulate to a certain level. Once this level is attained, the GoldFinX Foundation would store and protect the gold. Additionally, they will have discretionary powers over when and how to use the reserve.

The Forbes article went on to explain that “If a new regulation or a malicious attack impacts the company’s operations, their business plan establishes a base value protecting their coin offering.” This represents the main benefit to holding a PCO.

Why it’s a good example of a PCO

This project is uniquely equipped to offer a PCO because of the industry they are in, which is mining an actual physical asset (gold). What does seem odd, however, is that their whitepaper specifically refers to the offering as an ICO. Below, we see a bit of the normal ICO disclaimers you would normally find in an ICO whitepaper:

This is also unusual because the whitepaper barely mentions the utility of the token. So it’s not certain whether or not this particular offering is indeed an ICO or a PCO.

Essentially, the idea of this new version of coin offering is to take investor protection one step further. By holding a reserve of physical assets that integrate into the business model, companies like GoldFinX hope to make PCOs the cryptocurrency investment of the future.

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