ICOs — democracy, for better or worse
Commentary piece by Harveen Narulla
Co-founder, Hatcher & Founder of an emerging markets trade finance venture launching soon
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.)
The token we will issue and sell will not give a right to use a product or service. Nor do I think it is necessary to contort the narrative of what we are issuing it for, to manufacture a story about a product or service or system that token holders can make use of.
It’s a simple mechanism to allow the crowd to participate in the funding of trade and enjoy the returns from this. Some of the funds raised will go towards building out and operating systems to manage this. The rest will be used to fund the trade in goods.
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.