Have We Failed Reshaping Capital Markets with ICO?
I believe that Initial Coin Offerings (ICO), Initial Token Offerings (ITO) or other neologisms such as Token Generation Events have a deep impact on how assets can be redefined and what can be made a tradable asset. The tokenization of underlying values is fundamentally reshaping the way we possess, exchange and store value in a digitised economy. Also, opening investment opportunities to the small retail investor, contributing as little as a single dollar through a decentralised technology brings fundamental new possibilities. This all inspired me to leave my former job and follow this developing bigger picture, rather than just generating revenues on behalf of a centralised corporation.
I want to make this clear so the reader does not get me wrong — I am an avid supporter of the above mentioned.
Since early 2017 we have been experiencing interstellar growth in ICO volume across the world, allowing founders with a simple idea to raise millions in weeks/months, which would not have been impossible in traditional capital markets due to hindering institutional structures. Strong believers who considered themselves crypto investors collectively contributed considerable amounts of money in form of cryptocurrencies (BTC/ETH) in early 2016 and 2017 into ICOs such as the Decentralized Autonomous Organization, Bancor, Tezos and the like. Now, in 2018 I have been receiving numerous requests from large scale institutional investors (Family Offices, Venture Capital, Private Equity etc.) wanting to either invest in solid ICOs or tokenize their portfolio investments. In 2018 we witness a shift towards institutional money being invested in ICOs and ICOs thereby entering a new paradigm.
I act under the assumption that distributed crowdfunding is here to stay and a truly disruptive force. This disruptive force now has to face challenges: will it change the investment economy in a fundamental way or will the established players tame it to become an update of the ‘old economy’? I will discuss my concerns about the latter in the following paragraphs.
Information Sharing Reshapes Capital Markets
The internet has established itself as a means of communication and information sharing. In combination with blockchain technology it thereby offered the perfect condition to add a new dimension: value sharing. While the naysayers compare the rapid growth of ICOs to the dot-com bubble, I strongly believe that they do not understand how an internet of value empowers society by making it independent of middlemen and allowing for a free circulation of new money. As an economist I always love to use the word “perfect information” because I think we are moving at high speed towards a state in which information advantage in economy is becoming more and more difficult to maintain. The power of social media and the information collected and shared through the internet fills the knowledge discrepancy between the ICO issuer and the investor step by step. This means for the ICO economy, that the cryptocurrency market constantly adapts, balancing hypes and busts in near real time.
This is reflected quite strongly in the combined market cap of cryptocurrencies, with its high volatility (speculation of course factored in). If we assume that information distribution is efficient for all market participants, we can come to the conclusion that a free market in the cryptosphere will self-adapt to new paradigms of distributed fundraising anyway. If this is true, there is limited need for regulatory bodies, financial intermediaries and corporations to protect investors from the assumed dangers of ICOs. This rising global community has a self regulating power within.
Tokenization of Everything Reshapes Capital Markets
A digital representation of assets, securities and currencies in form of a token or coin, stored in a digital wallet directly with the owner has changed the way i think about the efficiencies of financial markets. Allowing our tokens to freely move between owners via token exchanges and peer-to-peer between wallets empowered any user to be independent from financial intermediaries and middlemen. Trading any fraction of a token on a 24/7 exchange against other currency/token pairs opened up our minds to trading any type of asset against one another. However, what if all these benefits become just a technical update to the existing capital markets infrastructure and the promises of a purely decentralised economy merely vanish in which we thought intermediaries and centralized organisations become redundant? We should not only focus on blockchains as a technology, but keep in mind what self sovereign identity and ownership as a value mean to us.
Regulation is Hindering ICO Capital Markets
I believe that some sort of regulation is important in capital markets to allow for even faster widespread adoption of Initial Coin Offerings. Ruling out bad actors in the ICO space e.g. those that after raising money never issued a digital asset, cryptocurrency or security. Excluding these bad actors are the right regulatory mechanisms we need to deploy and should all as investors be in favour of. However, what we currently witness is bringing old regulatory frameworks like the ones used for Initial Public Offerings (IPO) to the ICO economy. What the ICO promises is a full-fledged global and decentralised funding and trading on the primary as well as the secondary market. Now, with regulation stepping in, securities laws across the globe put us back to the “prospectus requirements”, making projects write 400+ pages on what potential risks might be associated with the security. Honestly speaking, I never read a prospectus when buying stocks of Alibaba, Amazon, Snapchat as in the end I was relying on my own fundamental research. There is of course more depth to it and we should not only look at it in a superficial way (e.g. background checks, KYC/AML are absolutely required). It seems like with ICO we are moving back to conventional capital markets, where investment banks will take over and charge absurdly high fees for services which to me in the world of information sharing are becoming more and more redundant. In the end the ICO is transforming to the IPO 2.0 from a regulatory perspective. If this trend continues, what will be left from our joint vision of making financial markets efficient again? The most recent trend endangers this vision.
Shorter Funding Cycles Reshape Capital Markets
Initial Coin Offerings are challenging current investment life cycles of Venture Capitalists or Private Equity Funds ex-ante Initial Public Offering. If we put ourselves into their shoes, exiting a Series A, B, C investment after an IPO within a period of 5–7 years seems likely a more risky approach than substituting Series A, B, C with ICO and be on the secondary market right after a couple of months. The natural movement for the investment firms should then be to turn into ICO houses, allowing them to capitalise on their investor network, while making investment banks redundant. Here again, regulatory constraints such as broker-dealer licenses might restrict investment companies to reinvent themselves, although blockchain technology and the crypto economy empowers anybody from retail to institution to collect money on behalf of the issuer (ICO company) globally. It is time to fundamentally rethink who is in charge of money in capital markets.
Will we innovators fail by disrupting Capital Markets with ICOs?
As with all innovation utopia was never achieved within a short time period neither exactly as imagined. However, financial market authorities should finally accept that using old capital market, classical, frameworks is merely harming the disruptive potential of Initial Coin Offerings. Initiatives such as reducing the ICO prospectus to a “prospectus light” requirements when issuing tokenized securities is just an undesired comprise by the regulator and ICO industry. I propose to allow the ICO industry to self-regulate more as I see that the free market is doing well conducting thorough research on ICO related investments. Structure and competition is forming and codes of conduct are created by blockchain related associations.
ICO platforms (marketplaces) or apparent ICO experts helping the issuer raise funds spring up like mushrooms while the power of information sharing and technology has empowered anybody to raise funds for the projects they want to realize. I strongly believe that in the end two fundamental powers such as capital (e.g. investor network) and technology (ICO fund collection technology stacks) must converge in a decentralised way. Marketplaces bringing issuers and investors together is not the final destination. We are entering into the Web 3.0 era and thus thinking peer-to-peer is key.
What do you think? I look forward to hearing your thoughts!
