Initial token offerings (ITOs), also called initial coin offerings (ICOs), token launches or token generation events, are one of the latest trends in financial services. ITOs have emerged out of the increasing use of distributed ledgers and blockchain technology, the software that underpins cryptocurrencies, such as Bitcoin.

However, are ITOs just another buzzword or fad in the Fintech sector, or are we seeing a new method of investing emerge? In this article senior associate Stephen Ozanne shares his top five things that you need to know.

1. What are ITOs?
Tokens (or coins) are a virtual form of investment, which have been created using blockchain technology. Some start-up technology companies are "issuing" tokens as an alternative means of raising capital by using an existing blockchain platform, such as Ethereum, to create and record the distribution of tokens as a form of investment in the start-up.

The investment terms of the tokens are pre-programmed into the blockchain to form a “smart contract” that can be automatically performed by software. For instance, smart contracts can autonomously transfer tokens to investors once the smart contract has recognised that all the conditions for investment have been met (such as transferring the purchase price for the tokens, usually in a cryptocurrency, to the issuer). A blockchain platform can securely verify and record transfers of tokens, and should be a transparent means for investors to monitor their investments (Bitcoin’s open blockchain ledger is publically visible online, although other blockchain platforms can be private). Since the administration of the token issue is automated by software, it is very efficient, and typically only the token issuer and investors need to participate. This has the potential to disintermediate (cut out) many of the parties that are typically involved in traditional forms of issuing investments.

Authored by senior associate Stephen Ozanne, this article first appeared in EnVoyage Magazine.