Rise of the Crypto-Accredited Investor
Cryptocurrencies, or “crypto” for short, are taking the investment* world and capital markets by storm. (* the term investment being used in the broadest sense for anyone looking to make financial gains).
Unregulated Initial Coin Offerings, or ICOs, have raised over a $US 1.7 Billion in the past year and show no sign of slowing. New projects with significant disruptive potential are getting funded to the tune of hundreds of millions of crypto dollars in hours. This all began with the blockchain-powered decentralization movement when projects re-imagined how they could go directly to investors, bypassing traditional venture capital intermediaries from Silicon Valley.
If you’re still new to investing in the crypto-space, a core concept of blockchain tokenization is that anyone with a digital currency wallet can send digital currency across the world and support their favourite project as a contributor, investor, or equity shareholder. Almost as easily as you can send an email — capital truly has no borders — you can send your digital capital (such as Ether, Bitcoin) across the world to a smart token and become a registered token holder. Smart tokens (tokens built as smart contracts), especially those created on the Ethereum public blockchain with the ERC-20 token standard, are liquid by design, allowing the contributor to resell their tokens to someone else in the crypto-space or in a digital exchange. Liquidity is a big feature for crypto investors looking to de-risk their purchase.
On the one hand, ICOs are exciting to many of us. Digital currencies that make micropayment possible give us all the freedom to participate with small sums of our digital currency capital. It’s a hyper-efficient global crypto-crowdfunding movement; no banks or brokers are required and therefore value transfer fees are low. Many cryptocurrency holders have become international project funders and token holders through ICOs.
On the other hand, I’ve written about problems with the no-KYC phenomenon and the need for more responsible ICO governance. Where there is no KYC, there are no clear investor protections.
I fundamentally believe that unregulated ICOs need an innovative regulatory framework before the ecosystem experiences a black swan event a la Bitcoin’s Silk Road. A mismanaged token ICO could damage the fledgling industry’s reputation for years to come.
Since many of the business models are so new and there are real risks to losing your contribution, regulators such as the Ontario Securities Commission (Canada) and the U.S. Securities and Exchange Commission have taken notice. Time will tell but it’s quite possible that many of these tokens are actually securities that fall under securities regulations.
The Traditional 1% IPO Problem: Accredited Investors are First in Line
The “1%” with the financial means to be deemed “Accredited Investors” and connections to big investment banks have traditionally been first in line to benefit from traditional IPO’s before the ‘everyday investors’ have had a chance to invest. “Accredited Investor” is a securities regulations term that defines someone with deep financial resources and enough financial income to withstand financial losses. They’re basically “allowed” to take greater risks based on their financial position.
From the point of view of “Everyday Investors”, the problem is securities regulations stack the table in favour of high net worth Accredited Investors (AIs).
Blockchain ICOs: Level the Playing Field
Enter blockchain ICOs. As I’ve said, ICOs in jurisdictions such as Switzerland have been appealing as they’ve levelled the playing field for Everyday Investors by not restricting access to their raises to Accredited Investors. Anyone with cryptocurrency can participate in this new future. Importantly, everyone with the knowledge to participate has the same access and equal opportunity to become a token holder.
The upcoming Filecoin ICO is different. It’s a great concept for distributed file sharing with significant potential for upside. They’ve indicated the project will seek $700M+ , making it larger than any ICO in the young history of ICOs. It’s a project that many of us who have followed IPFS would invest in but, as it’s US-based ICO, we hit the Accredited Investor hurdle — and most everyday retail investors are shut out. You’ll have to prove that you have AI status before you’re allowed into the club.
The Problem: Many AI’s Don’t Understand Cryptocurrency
More and more everyday, I get asked to help people invest in cryptocurrencies. My response — regardless of your financial position — is that if you know nothing about Bitcoin and haven’t invested in understanding the space by watching the hundreds of available ‘Bitcoin 101’ YouTube videos and tutorials, you need to get educated first. The crypto-space is volatile and therefore too risky for uneducated investors.
But with FileCoin, AI’s and well-heeled VC’s are being allowed into the tent because of their financial status. Many crypto-savvy technical people who know their way around crypto-wallets, know how to manage private keys and may even read the code, aren’t necessarily financially accredited investors (yet!). They understand the technology and business models but are prohibited from playing.
So, with the FileCoin ICO we’re back to a fundamental problem: current regulations result in further wealth concentration with the financial class.
A Solution: A New Class of Crypto-Accredited Investors
First, to help us realize the potential of blockchain and democratize global investing, traditional AI’s in the financial class could more accurately be called ‘Financially Accredited Investors’ (FAIs).
FAIs can surely be encouraged to continue to actively supporting innovative projects but let’s expand current regulations to a new investor class.
Next, if you’re a crypto-finance geek and not quite an AI, you could benefit from a new class of crypto-finance investor that I call the “Crypto-Accredited Investor” (CAI). Crypto-finance investors combine technical experience with financial and capital markets experience. Many of us actually develop code and generally understand the ICO business models. Crypto-knowledgeable investors may not need the same protection as someone who doesn’t understand the technology. They should be given an opportunity to play in the same space as FAIs.
As is said, with great power and freedom comes great responsibility. I envision the Crypto-Accredited Investor of the future:
- understands blockchains, tokens, and digital cryptocurrency exchanges;
- has acquired cryptocurrency;
- is technically literate;
- knows how to read code if the project is technical in nature;
- limits his/her investment to reasonable, common sense levels of portfolio concentration; and
- understands the investment** proposition of the business model.
** Let’s be clear : “investor” is the operative word. We’re not talking about a new breed of pump and dump specialists….we don’t need to encourage speculators. I’m also not advocating for KYC-free capital markets. KYC clearly helps combat anti-money laundering and terrorism financing issues.
The Bottom Line: Knowledge Should Provide Equal Opportunity
1. Blockchain was created on the basis that decentralization would empower individuals to transact with fewer financial intermediaries. Decentralization principles can enable more of our society to share in building wealth beyond the “1%” who are financially-accredited investors.
2. ICOs are an exciting and innovative direction for the future of venture funding. There is of course much to be learned as this form of project financing matures but we should promote and nurture its efficiency and global reach. Regulations should seek to innovatively promote blockchain innovation for Everyday Investors.
3. I’ve proposed complementing today’s AI — more aptly called Financially-Accredited Investor (FAI) — with a new class of investor : the Crypto-Accredited Investor (CAI). CAIs may not have the financial means of the FAI but they can qualify as suitable investors through their deep crypto-knowledge.
The bottom line is that if you’ve invested the time to understand the disruptive innovations in blockchain technology, you should be allowed onto a level investment playing field.
I’d love to hear your views on a new Crypto-Accredited Investor status. If you’re a crypto-finance tech geek who understands the technology, and wants to influence a regulated level playing field, reach out to me at email@example.com