Up until very recently, Initial Coin Offerings (ICOs) were an altogether too-easy way for aspiring entrepreneurs — armed with a wish, a prayer and a whitepaper — to get their hands on unfeasible amounts of funding from mostly retail investors, who had their own dreams of getting richer than they could ever have hoped using more conventional methods.
There have been commentators calling out this phenomenon as a modern-day tulip frenzy, and others who likened it to the IPO bubble of the late ‘90s, which saw the NASDAQ soar to improbable heights only to come crashing down shortly thereafter, losing 80% of its value.
A crucial difference with the NASDAQ crash was that, as painful as it was to those who had invested, the securities in question had at least gone through the minimum standards of due diligence imposed by the formal IPO listing process.
Apart from some voluntary regulatory initiatives such as in France, no such onerous formality was (or is) imposed on would-be founders before launching their coin offering.
Caught between a regulatory rock and a hard place, authorities around the world have struggled to find a suitably proportionate response to ICOs: one which both protects investors and safeguards market integrity, while still conveying a message of being forward-looking and innovation-friendly.
Out of all the ICO projects which were funded, aided and abetted by a raft of paid influencers who ‘shilled’ so-called shitcoins shamelessly, there is a dearth of verifiable and factual reporting about exactly what has been done since with the money raised.
Utility and regulatory arbitrage
The lack of regulatory harmonisation, particularly in the European Union and in nearby jurisdictions, has made it all too easy to leverage regulatory arbitrage mechanisms across borders.
Should you be so inclined, you might decide to launch an ICO in crypto-friendly Switzerland using an empty shell of a holding company, hire staff using a subsidiary in a neighbouring country for reasons of cost and convenience, all the while leveraging inter-bank arrangements via Liechtenstein to convert crypto-currencies into fiat in order to pay the bills.
Putting questions of sovereignty to one side, it doesn’t matter how crypto-friendly any given jurisdiction wants to be, it is in no regulator’s long-term interest to tolerate such a status quo.
Given the estimated amount of funding that these projects drained and the precious little value that has materialised, it is frankly bemusing that there is not more of a backlash, either from the investing public or from the regulatory authorities.
Out of all the utility tokens created, what indeed is the level of network usage of each project and how many users are experiencing the purported ‘utility’? More importantly still, is there even actually a network, a product of sorts, a service to be consumed that could justify the existence of a token of the utility genre?
Safe-guarding the public interest
Due to the sheer enormity of the amounts raised through ICOs, it is very tempting to reason only in macro terms. We can talk in abstraction about a ‘natural evolution’ of the innovation cycle, or about a ‘correction’ and about ‘markets maturing’.
But it’s important to remember that behind the technicalities, the charismatic founders and the many, many millions raised, there are actual real people who are getting hurt.
An unintended consequence of countries adopting a pro-crypto stance is that in the absence of rigorous enforcement, such regulatory frameworks allow opportunistic, unscrupulous and self-serving individuals to escape detection and fall through the net by masking themselves in a thin veil of incorporation.
In much the same way that we keep matches away from children and pyromaniacs, the experience of ICOs has shown us just how much more vigilant we need to be in how we control access to capital and funding.
In the wrong hands, funding is dangerous.
In the wrong hands, funding can turn into a weapon of mass destruction, wreaking a path of havoc that endangers livelihoods and damages families.
Low standards demand that we raise the bar
Not all aspiring entrepreneurs are sufficiently competent or have a solid enough business concept to be worthy of external funding. And by not filtering more stringently the quality of projects which do get funded, we end up penalising bona fides ventures which actually might have a shot of delivering sustainable value and creating jobs.
There is a very particular category of self-declared serial entrepreneur who benefited massively from the ICO boom. The type of person that any reasonably smart VC would have taken one look at and dismissed summarily.
The kind of person who plays fast and loose with the truth and who has an unhealthy disregard for rules and regulation.
The kind of person who has no problem whatsoever in charming a team of talented and experienced people away from stable jobs, by promising holocracy and tapping into their inner desire to work on a fulfilling project of societal significance and scale.
The same kind of person who thinks that there is nothing unethical about a producing a whitepaper — full of baseless ‘client’ logos and spurious claims of partnerships — which has little, if any, basis in real capability.
The modus operandi of these people stipulates that as long as something serves their personal interest, who cares if it’s ethical, feasible or true?
And therein lies the problem.
Accountability and regulatory concertation
Too much money was raised in ICOs on the basis of lies. Shocking, unadulterated falsehoods for which there are no repercussions. And yet, outside of the US, is there any real clamour for accountability and redress?
Innovating in more ways than one, ICOs are managing to disprove an age-old law of economics by offering hungry founders (who have no qualification to be entrepreneurs) a ‘crypto lunch’ which is still entirely free.
With few demands for accountability, what is to stop this happening again?
Arguably, investor appetite has abated causing the ICO market to contract. However, passively watching the market to ‘mature’ organically as a way of righting past wrongs is reneging on an ethical and institutional responsibility to sanction those who knowingly and remorselessly profited on the back of the masses who had the misfortune to cross their path.
While remedial enforcement at the micro level would be salutary, at this stage it’s not enough for any single regulator to take a stand. What is needed is internationally concerted action to put an end to the regulatory arbitrage, underpinned by a ‘crypto-friendly’ narrative, which is offering institutional safe-harbour to the fraudulent and the incompetent under a recklessly thin veneer of financial and technical innovation.