Evolution of Capital Markets
“When you’re at a focal point of history, you don’t realize you’re at a focal point of history,” said Ron Wayne, the co-founder of Apple who sold his 10% stake for $800 in 1976.
We are currently at exactly such a focal point, and it is called an Initial Coin Offering, or ICO, which sounds like an IPO. An ICO is a capital-raising model that works much like crowd funding, and runs on the blockchain — a public ledger.
The blockchain is a transparent database that can be accessed by all. This new “ledger in the cloud” is likely going to change everything as we know it, much the same way the internet did almost 30 years ago, when most people thought it was just for connecting ATM machines and chat rooms. It’s as formative as the creation of our stock markets in the late 1800s.
What used to take an investment banking team, valuation experts, certified offering documents, audited financials and regulatory sign-offs to launch a lucrative IPO can now be done with a bit of technology and a promotion. The blockchain allows people to launch capital-raising ICOs, requiring only a service agreement from the token creator, a white paper and a talented management team — one with connections in the blockchain community and that knows how to spread the word on social media and in the press.
The ICO market is a new transparent egalitarian “sand box.” It’s a cool-kids table that this time is being run by the “nerds”; they have created a platform that gives them the control. When it comes to this new marketplace, these nerds are the new dealmakers in the room.
This is a New World Order and it levels the playing field.
Where is this shift in the financial markets? No longer is there a central authority or exclusionary club being depended upon or insulating the capital markets for only a select few. The walled garden for investing, capital raising and entrepreneurship is being knocked down by a blockchain bulldozer. It removes the draconian process and the government-imposed regulation, and it opens the door to opportunity for all — not just the Wall Street dealmakers. Up until now, much of the power controlling our markets was concentrated in too few hands. On the blockchain, everyone has an opportunity.
For the moment, only blockchain-related startups or blockchain ideas have used initial coin offerings as a vehicle to raise early capital. The use by startups, however, is going to progress sooner than we realize, much the same way cryptocurrencies are quietly sneaking into our favorite coffee shops and ATMs. This advancement is being driven by the simplicity, accountability and transparency of the blockchain model. The new cloud-based-ledger model provides the “all access” that we were never previously given and it attempts to keep everything transparent. It is easy to foresee how the ICO market is going to replace the costly and exclusionary capital-raising model.
What is it about these new offerings that shifts the paradigm from Wall Street to Nerd Street? There are several ideals to the ICO marketplace, key among them it’s supposed transparency. We are in a world where everyone’s story, background and the party they went to the night before are out there for the world to know about, with just a simple google and social-media search. This transparency is being attempted in the ICO market by utilizing the democratization of information to benefit investors, i.e., every transaction on the blockchain is recorded and out there for public awareness. However, I am not yet so sure it is all that it purports to be or, for that matter, would like to be. More transparency will come, though, as the legal framework, consultants and rating agencies are developed and as this entire new market matures.
As further background on the ICO market, simple ideas or business plans are being funded without the substantiation that has driven the capital markets in the past. Investors purchasing these tokens are essentially buying some future product, service or access to a technology at a reduced rate that is tied to that coin. The crypto-tokens offered in these ICO sales are developed to fulfill varying functions and roles. Some act as currency, while presently most are created to serve a current or future utility function and yet others equate to equity ownership of a business. Since last year, $1.8 billion has already been raised in the ICO market. Examples include currency tokens Bitcoin and Ether, a multitude of utility tokens such as TenX, Status and Civic and now equity tokens like Blockchain Capital and Braid
According to MarketWatch and the price history, $1,000 invested in Bitcoin in 2010 would be worth $35 million today.
Currently, each company designs its proprietary token to meet the needs of its future business, which becomes part of the ICO’s crucial promotion stage — not yet a fundamental economic play. Economical value creation will develop going forward. In the future, the ICO marketplace is going to become the capital market for all phases of a company’s development. Economics, fundamentals, management experience, sales and earnings are where the ICO marketplace will evolve — but it likely will always have its roots in early-stage companies.
Another ideal of crypto finance is the decentralization of the financial system, meaning ideally that abuse of power or a breakdown of the whole market doesn’t happen. By spreading the control of the system to the group of users, instead of among only a select few, the belief is that the group consensus will get it right and hold itself accountable. This accountability of the system does in fact seem to be present within a blockchain. Witness the way the community got together to make the system whole when $50 million of virtual currency went missing in the DAO ICO. How long this “kumbaya mantra” will exist, one cannot be sure. Does decentralization also protect against scammers and hackers? No, but neither do the regulators.
In the coming months and years, regulation will be the next struggle or battle for the ICO market, but this will not happen without pushback from the tech community, with its push toward decentralization. What will the SEC’s DOA commentary paper have on current ICOs? I’m not sure it will be much more than ensuring that the scammers act smarter to avoid regulation and that the better deals are more fastidious and choosy about their coin structures and their listing associations. Until new laws are written — and there is little doubt that they will be — things probably will not change that much.
The new ideas, new technology and the new millionaires that are part of this developing market need to be part of some larger decentralization and democratization of the world. It will be a new ecosystem where everyone is open to the same opportunity — a form of collectivism without any one particular control group running the show — where the crowd is making decisions as a whole. This makes for a tremendously exciting future, where the power is in the hands of the people rather than in those of a few self-serving individuals, although a lot of wealth has come from the latter too.