“impak Coin” Token Sale: Cryptocurrency for Impact Investing
Disclaimer: The opinions expressed in this article do not constitute investment advice and independent advice should be sought where appropriate.
impak Finance is attempting a token sale to fund the development of an “impact economy”. This article will review impact investing, blockchain technology and token sales, and briefly review impak’s approach.
Impact investing has recently burst forth with new projects and momentum. The Financial Times suggests that 2017 may be a breakthrough year for this ambitious investment idea. Along with the hype, we are now observing some applications of blockchain technology and cryptocurrencies (see my prior articles here and here) in the social sector and impact investing space. This comes with many challenges beyond the technology involved.
An estimated $4.5 trillion per year in capital is needed to support the sustainable development of humanity. This challenge is the focus of the 17 United Nations Sustainable Development Goals (SDG). Meeting these objectives requires a concerted effort not only from non-profits and their philanthropic and government grants, but also from the private sector which can devote capital and solutions to the cause. It is here, the private sector, where impact investing is being tried.
An impact fund is an experimental investment instrument that tries to generate social and/or environmental good and provide a return of principal, with a return on investment ranging from zero to market rate. Impact investment attempts to fill a gap between the non-profit to for-profit investment spectrum. Specifically, it addresses revenue-generating and mission-driven social enterprises that achieve breakeven cash-flows and traditional for-profit business that allocate a portion of incomes to charity or have active corporate social responsibility programs.
Today, impact investment has yet to prove whether it regularly achieves financial returns and social goals (see New York Times article here). Also, while it is easy to measure financial returns, social return measurements are often weak and inconsistent.
Despite these uncertainties, impact investing is a US$115 billion market, fashionable, and growing. Entrepreneurs and citizens are increasingly attracted to impact funds because of their desire for social purpose and generating profits.
Over the years, the impact investing community has formulated standards (i.e. Global Impact Investment Rating System, Impact Reporting and Investment Standards), built infrastructure (i.e. Aspen Network of Development Entrepreneurs, and the Global Impact Investing Network), and continues to experiment (i.e. B Corps, Forest Resilience Bonds, etc.) One such experiment is being spearheaded by impak Finance, an early-stage startup that attempts to test the suitability of blockchain technology and token sale venture for impact investing.
Blockchain and Token Sales
In short, blockchain technology is a type of software database structure that records transactions and their timestamp (like a digital ledger), such that records are immutable, peer-to-peer, and involve a consensus mechanism (see prior article here). This technology has profound economic implications.
To achieve this, blockchains use several cryptographic protocols. These protocols facilitate a way to govern a network through digital meritocracy. This has spurred an ecosystem of innovations that include networks of decentralization and dis-intermediation. For example, it is now possible to transfer stores of value from one party to another without requiring intermediary, regulatory, or governmental parties. Instead, such transfers are facilitated by software code and multiple stakeholder nodes. This has created cryptocurrencies such as Bitcoin, Ether, Zcash, and many others.
Tokens are types of cryptocurrencies that can offer functions beyond a simple storage of value. For example, tokens can offer token holders a combination of: access, voting, payment, contribution, profit/fee, or blockchain creation rights (see here).
Tokens have been around since 2013, and have recently exploded in popularity (890 cryptocurrencies as of this writing). Token sales have been called different names (crowdsale, initial coin offering (ICO), etc.) They involve the market sale of a new token that affords token holders certain features or rights and are often tradable on digital exchanges. Details of token sales are defined in a “whitepaper.” Today these pre-sales allow early-stage companies to finance the development of projects—that are often still at concept stages. The pre-sale value is linked to expected future usage and network effects, and the sale price can increase in response to the token sale design of supply and demand (i.e. capped sales, Dutch auction, etc.)
Proceeds from token sales can be received by the seller organization itself or (as some advocate) by an independent foundation such as a non-profit. Funds are distributed toward the uncertain development of untested projects usually through a specified vesting schedule and promise token holders the ability to exercise certain rights or at least, a liquid and tradable token market. impak Finance will conduct a token sale on June 26, 2017, to fund the development of its social network and impact economy.
This Canadian startup seeks to create a Schedule 1 bank, a social network (impak.eco) and cryptocurrency focused on the impact economy. impak just completed an equity fundraise of CAD$1.5 million, and are led by a team with diverse experience, and a six-person advisory committee that includes Dr. Marguerite Mendell, a Ph.D. economist from McGill University; and Bill Young, President of Social Capital Partners, a Canadian impact investment firm.
impak proposes a new cryptocurrency called “impak Coin” or “MPK” to facilitate the funding of an impact economy.
“By design, impak Coin will build loyalty, reward collaboration and encourage its holders to buy from accredited impact merchants who are part of the impak.eco network.” — impak Finance
At the retail level, the coin will facilitate transparency and zero transaction fees (compared to conventional credit card transactions) between socially-focused and accredited merchants, and consumers with a social-purpose purchase preference. There are incentives built into the coin—including referral and cash back bonuses; and disincentives such that conversion from MPK to Canadian dollars incurs a 2% fee. At the ecosystem level, impak plans to provide APIs to enable developers to build additional functionalities into the ecosystem.
They anticipate connecting 500 enterprises, 150 capital partners, and 5,000 user participants by Q4'2017.
impak Finance plans to raise between CAD$500,000 and CAD$10,000,000 through this token offering. Unlike other token offerings, the impak coin will NOT be tradable on digital asset exchanges, and instead will be tradable on a permissioned market managed by impak Finance.
Below is a brief four point analysis of impak’s approach, followed by suggestions.
1. Blockchain Choice
One key feature that blockchain technology can provide is transparency.
With an open source blockchain, the public is free to inspect the underlying code to verify execution instructions, how funding mechanisms like a token sale are handled, etc. For example, anyone can access the Ethereum blockchain code to inspect and dispute the functionality of the software.
impak Finance has chosen to use the WAVES Platform, a “blockchain-as-a-service” to facilitate their tokenization. impak reasons that using WAVES offers the advantages of an “off-the-shelf” solution for companies without the capability to work with a blockchain. While WAVES is open source such that the public can inspect the code and WAVES transactions using WAVES’ browser, there is a troubling lack of specifications and documentation available online for this “open source” platform.
impak also asserts that WAVES’ use of Leased Proof-of-Stake (LPoS) consensus algorithm is more energy-efficient than the energy-consuming Proof-of-Work (PoW) algorithm used by Bitcoin and Ethereum blockchains. While LPoS with WAVES is energy-efficient, the performance and attack resistance of this algorithm is still under study. (Ethereum will transition to a PoS algorithm in the upcoming Casper release.)
While new blockchain-as-a-service token sale platforms (i.e. Bancor, Counterparty, WAVES, and NXT) begin to offer new ways for organizations to leverage token sale and blockchain technology, they potentially introduce greater risks than if they were offered using more rigorously tested, standardized, and vetted blockchains like Ethereum. Token sales and blockchain services should be vetted for compliance to standards like ERC20 and for availability of robust documentation. I am looking forward to seeing impak further demonstrate the suitability of the WAVES platform for tokenization…
2. Market Structure
impak coins will transact on a permissioned non-tradable market (not on digital exchanges), with a money supply that is monitored and controlled by an “MPK Governance Body”. This approach will likely help with compliance to AML-KYC and tax regulations. And by not allowing secondary market transactions (listing on digital exchanges), impak is attempting to provide greater price stability by removing speculative trading.
The market design created by transacting on a permissioned blockchain can facilitate tacit collusion among businesses (see here and here). Tacit collusion occurs when businesses interact repeatedly in a marketplace and are able to indirectly coordinate higher prices over time—effectively harming competition and reducing consumer surplus. By increasing the barrier of entry for new businesses (they must be accredited or rather permissioned) and providing a method for businesses to observe marketplace transactions on a transparent blockchain, the impak ecosystem may facilitate collusive behavior–though I strongly doubt collusion is a likely outcome in this case. There are several reasons why, which I will over in a forthcoming article.
The costs and benefits between permissionless and permissioned blockchains are the basis of ongoing debates (see here and here). impak will have to demonstrate not only healthy marketplace competition, but also security, good governance, and price stability.
3. Token Price Calculation
impak is conducting a multi-currency token sale by accepting fiat, and 2 cryptocurrencies (Bitcoin and Ether). However, I am uncertain whether this sale is pegged to a single currency or kept in multi-currency funds. If pegged, then how is conversion price calculated for unpegged currencies? A single currency peg should be used and explicitly stated. Conversion price should include a method to recognize time of conversion and a method to calculate a price based on multiple exchanges.
4. Impact Measurement
The great challenge for impact investors is how to measure impact. For early entrepreneurial impact investors and investees a logic model and social value criteria are minimally sufficient; however, this results in a more ambiguous measure of impact. impak describes a scorecard based on the 17 SDGs as criteria to evaluate all potential investees for impact and accreditation. Yet no specific details or KPIs are offered now since impak notes in the whitepaper that the scorecard will be finalized by Q3'2017. For a token sale that focuses on impact investing, more disclosure on how impak approaches these measures would strengthen their proposal.
Update: please scroll down to the bottom to view impak’s responses to some of the above points.
Impact investing faces several challenges including:
- effective intermediaries,
- broader recognition of social investment as an asset class,
- regulatory reform to activate the market,
- social investment trading platforms, and
- clear and standardized measurements of social impact.
impak is taking a first attempt at solving some of these challenges by applying cryptocurrency to impact investing. They have a promising and talented team, are innovative, and their scorecard approach seems fitting for a company of their stage. I am looking forward to see what details they disclose, how they evolve and pave a path for others in the social sector to learn from and replicate.
A few key takeaways for others who may be exploring this space:
Scrutinize. Choose a blockchain system that fits your organizational needs. Review the code, ensure robust documentation, check for clear and explicit whitepapers, and evaluate the technology fitness. Use open source protocols and standards where appropriate, and use code that has been vetted by a broad community. Creating token marketplaces may have unintended consequences (tacit collusion).
Explicitly and clearly define impact methodologies and strategy. Here is where impact investing is often weakest. Scorecard and logic models are a minimum for early-stage entrants, in lieu of more gold standard and resource intense methodologies such as Randomized Control Trials and Social Return On Investment (SROI). For an investment ecosystem, delineate how impact will be measured and tracked. Also consider measures of “additionality”, or whether the outcomes would have occurred regardless of action.
Avoid shortcuts. Blockchain-as-a-service (BaaS) can lower the barriers to entry for organizations wishing to deploy tokens and cryptocurrency markets. But they can also create risks (hold-up and governance), security issues, and oversight if organizations are not careful to allocate time and resources to conduct robust audits and evaluations.
Impact investing has yet to prove whether it can deliver regular social and financial returns. Organizations in this space must continue to work together, form best practices, and share failures as well as successes. For a financial and social instrument that is still fragile, the impact investment community needs greater integrity and continued innovation.
Let us see how impak’s ecosystem performs with this approach of using permissioned blockchain and token sales. While reducing transaction cost and providing social-purpose accreditation offers some benefits, whether they outweigh the complexity and risk of blockchain and cryptocurrency is uncertain.
If nothing else, they have us all thinking about a very interesting problem and their effort is poised to be a first mover in this space.
Stay tuned for more...
Special thanks to Dominick Leiweke and Dimitri DeFigueiredo for comments and suggestions.