ICOs — democracy, for better or worse

Commentary piece by Harveen Narulla

Co-founder, Hatcher & Co-Founder, Kommerce (remediating failed markets for trade finance in frontier markets)


EDITORIAL NOTE, 22 Oct 2017: This piece was edited on 22 Oct 2017. The original post dates to 9 July 2017. Edits are merged within the post but they are important in the context of the subject matter and carry valuable lessons, so I have explained the edits at some length below.

I chose to make edits to the piece as pertain to security vs utility tokens instead of taking the piece down because my remaining concerns about investor protection and the rush to ICOs are still relevant, perhaps even more so.

The post as a whole focused on the rush then (which continues to date) by companies to raise money via ICOs, which involve selling tokens in exchange for money. There are two types of tokens — security and utility tokens. Our project initially started out to plug the gap in we had observed in trade finance in frontier markets. My team’s early thinking on this area focused on the trade finance gap itself as a problem we sought to solve, instead of a symptom that indicated the real problem. To solve such a problem by merely throwing money at it (and first raising it elsewhere for return) does not create any ecosystem, or involve actors in any participation in managed interactions, or even require a proposed token to be used in such a system.Hence, early solutions I considered were shaped by the definition of the problem as simply the gap in trade finance. This made it unlikely that we would be deploying a utility token.

About then, my team started studying whether our problem definition was indeed on the mark. We realised (credit largely to my co-founder at Kommerce, Karen) that we had settled on a ‘problem’ (the gap in trade finance) that was actually just a symptom. The real problem was that these markets were in various stages of a market failure in the area of trade finance; and that this manifested in the gap in trade finance I had initially decided we would work to address.

This is to me an example of how:

  • High-trust teams produce higher quality output.

Karen, who’s mostly unsung and never seeks credit, called it. I remember clearly her telling me, “Singh, we’re dealing with a lemon market. It’s a market failure we need to fix. Fix this and the financing gap will sort itself out.

She had been studying the trade finance gap from an economic theory lens. We go back a long way and I’ve come to value her instinct. Trusting this, we decided to slow down the project (against the backdrop of many other projects that were just rushing headlong and even accelerating to ICO). We studied the problem much deeper, and spent many weeks understanding the edges of the problem. We realised a solution would need to be systemic, and that’s was the genesis (yes, a pun!) of our thinking about our utility token. I will leave the details of the utility issues for explanation elsewhere in our project literature.

Never have I been prouder to go back and edit a piece I’ve written than I am with this. I’m convinced we’re attacking the real problem in trying to remedy the market failure we’ve identified. The work we seek to do with Kommerce can improve lives for large numbers of people. If we succeed the world will be a different, better place.

  • Sometimes, slowing down and taking time helps.

It sounds like anathema in today’s fast paced world, but there’s actually a sound basis to it. (Read Thinking, Fast and Slow by Daniel Kahneman, which I highly recommend.)

I know many were perplexed about the length of time we took getting our project to the start line. I’m happy we took that time. Our thinking is clearer, our understanding of the problem more nuanced, and there’s a much bigger ‘why’ to our motivation.



In the past weeks I’ve seen ICOs (Initial Coin Offerings) pick up pace. (For a good explainer on ICOs, see this piece by Balaji S. Srinivasan)

In an ICO, the issuer (usually an enterprise or company) sells a token it has issued, for value (received in a crypto currency).

The token gives the purchaser the right to participate in a system, use a product or service or to receive profits (the latter being the minority of ICOs I’ve noted so far).

It’s fair to say much of the investing community has yet to figure out whether these tokens will have residual value beyond the short term, but, is also banking on a short term increase in valuation of the tokens as they are traded in a frothy market. It’s a classic speculative market.

Unlike IPOs which mostly happen when companies are fairly mature, ICOs are a mass fundraising exercise from the crowd, happening when enterprises are typically early in their development.

The potential of any of these ICOs to deliver real value to token purchasers is unknown.

It’s possible to make an educated guess (looking at business models presented) that many tokens sold at ICOs will struggle to retain significant underlying value (as opposed to speculative value) in the medium to long term.

I’ve always sought to build real businesses that return value to stakeholders. My team and I are preparing an ICO for our trade finance business. We’re raising money to finance trade flows between producer economies and emerging markets. Emerging markets have suffered from a lack of investment for a host of reasons. Yet there is unmet demand for products. Funding the supply of goods to meet this demand will allow a new swathe of entrepreneurs to emerge and contribute to their economies. (It’s a separate conversation that aid has mostly failed developing economies, and what’s needed is to encourage participation by their peoples in commerce.)

My team and I asked ourselves some questions about what we would want from the tokens if we ourselves, or our family and friends, were buying them. The consistent answer across our introspection was, that we would want the following:

· A real business or thesis for why the money is being raised

· Broad guidance on how the money is to be used

· Clear explanation on how the business plans to generate gains

· Clarity on how gains would be returned to contributors / token purchasers

· What happens to tokens if certain events take place — an acquisition, a liquidation, a business restructure etc

The last 3 points are relevant to enterprises that seek to make money (as opposed to a closed-ended / defined collaborative developmental effort in the blockchain space).

It is not too much to ask for token issuers whose ICOs fund the development of businesses to be clear about the answers to these points. If a token issuer is unable to be clear about these, then the correct thing to do is to not issue the token.

The answer to the last point especially requires an understanding of those corporate actions and the different rights of various stakeholders in each situation, and an ability to think through where, fairly, token holders should sit in relation to them.

There is no regulatory regime specifically governing ICOs at present. But this should not get in the way of responsible token issuers thinking through and reaching a landing point on these questions. It may be tempting to hit the community for ‘easy’ money but doing so irresponsibly hurts us all — investors, entrepreneurs and the ecosystem.

Some of the ICOs I’ve seen in our space (trade finance / working capital finance) will struggle to make money — this is just from casting an experienced eye over their stated business models and understanding bottle necks and risks that the teams do not seem to have a sufficient appreciation of. I’ve mixed feelings about that. Of course, I don’t want people to lose money avoidably. That’s never nice. However, I don’t want to shut down the mechanism of ICOs because it does democratize the ability of people to bring ideas to the global community and put firepower behind them to make them a reality.

I’m reminded of a quote I read on social media a couple years ago (author unknown):

“One of the best things about the internet is that it gives everyone a voice. Sadly the worst thing about the internet is that it gives everyone a voice.”

With ICOs as with the Internet, the democratization they bring is a huge value add to society. What are needed then are strong leaders willing to use the tools wisely, and with a view to creating maximum benefit, or at the very least, act sensibly, responsibly and in good faith.

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