There are also security issues. Unlike how they’re advertised, blockchains are not bulletproof and are vulnerable to network attacks. This can result in frauds like “double-spending”. The success rate of such attacks increases in smaller networks that are prone to centralization.
The recent “51% attack” on the Ethereum Classic network is an example of how such an attack could play out. Distributed ledgers, including RentalCoins, are thus vulnerable to manipulation and immutability is not a guaranteed feature.
Given how volatile the price of ICO tokens are and why their value has plummeted in other instances, building a stable ecosystem on the back of native token for payment in hindsight seems flawed.
What is the cryptocurrency space?
To make matters worse for Drivezy, the very viability of ICOs has been brought into question given the Reserve Bank of India’s crackdown on the Indian cryptocurrency space. By excluding cryptocurrency-based startups from the entire banking system, it is unclear how RentalCoin 2.0, the second phase of Drivezy’s ICO, will proceed, which also includes the public issuance of the token.
Drivezy has also been backed into a corner by the ever-evolving regulation around crypto-assets.
In December 2017, the US Securities and Exchange Commission (US SEC) declared the ‘MUN’ token in the Munchee ICO, an offering by a California-based company, as a security token, setting a clear precedent as to the various kinds of scrutiny a token offering could face in the future. Later in 2018, the US SEC declared that it does not view bitcoin and Ethereum as securities, establishing a sort of a benchmark of what kind of crypto asset could pass as a utility token.
Developments like this have led Drivezy to now claim that it never even did any ICOs. In his email response to The Ken, Singh claims that what Drivezy did were STOs, Security Token Offerings.
Never mind that this stands in stark contrast to Drivezy’s white paper, where the term ‘ICO’ appears from start to finish. ‘STO’ isn’t even mentioned once. The word ‘securities’ itself only appears twice and never in the context of the token.
Various forms of the token offering
STOs are another form of token offering, which has gained popularity since the US SEC delivered its Munchee verdict. These can practically be considered as digitized conventional securities. In plain speak, it’s like creating a digital version of stock certificates on a token.
“Securities offering has become a buzzword lately, and there is still lack of clarity on how a fully compliant STO can happen,” Anirudh Rastogi, founder of Ikigai Law, a law firm advising on technology ventures and ICOs.
However, just cloaking its ICO in a different robe may not overcome the regulatory hurdles ahead of Drivezy. Just last month, the Chinese financial regulator called STOs illegal. “If it’s a security, then the token issuer would be required to meet with the compliances that are provided for similar investment instruments such as shares, debentures, etc., in each jurisdiction the tokens are offered,” says Rastogi.
Drivezy claims that it has worked with its legal counsel to ensure regulatory compliance in all jurisdictions. However, Drivezy seems to have been well and truly boxed in by regulations. “Due to the changing regulatory landscape surrounding blockchains and cryptocurrency, we have not conducted any further token sales to date,” Singh says.
Judging by Drivezy’s white paper, it seems that the company did try to comply with the exemption requirements of the US SEC around security offerings. However, it’s unclear from the document whether this was done for all the jurisdictions they have raised investments from, given that ICOs are global events.
Adding to the uncertainty around the future of Drivezy’s ICO is the fact that the entity that performed the ICO fundraising is not based in India. Singh, for his part, claims this was all above board. “We have raised funds only from foreign accredited investors. We received the funds in India as FDI in line with the requirements of all relevant regulatory bodies,” he says.