“Helicopter money” via ICO
Blockchain.. the buzziest word in the whole tech space in 2016 and 2017. While from a technological point of view, blockchain is definitely one of the most exciting and ambitious initiatives across all industries, from the business side it’s still at very early stage (so called “prove-of-concept” stage for the whole industry). Despite a lot of noise around blockchain industry, there are not to so many investment deals in this area as it was expected a year ago: blockchain accounts today to only 2% of the whole fintech market.
ICO (initial coin offering) is an amusing innovation of the market. It is a mix of IPO (selling of company’s stock but for cryptocurrency instead of “standard” money), crowdfunding and p2b-lending. The total amount raised during ICOs in 2016 is around $250 million and… already more than $1B in 2017!
Ray Dalio, by one measure the most successful hedge fund manager of all time, argued in a note to clients that central banks will eventually have to usher in what he calls “monetary policy 3” — where rate cuts were the first stage and quantitative easing the second phase — which will more directly and forcefully encourage spending. The Bridgewater founder says this third era of monetary policy will range from central banks directly financing government spending through electronic money-printing to what the famous economist Milton Friedman coined “helicopter money” in 1969, in other words central banks disbursing cash directly to households. (In this case, is it possible to consider that involvement and shift to “basic income” in Finland, Switzerland and other countries is not measure of social or economic policy of these countries, but to the “helicopter money?”)
Initial Coin Offerings, or ICOs, have rapidly emerged onto the startup scene as an alternative way for founders to raise capital directly from the community without suffering any dilution. By ‘tokenising’ their organisations — that is, designing a ‘token’, which acts as a unit of exchange in that technology’s ecosystem and is often available for secondary trading — founders can now raise funds quickly, in a crowdfunded model, with incredible network effects. Communities of people that hold a startup’s tokens are incredibly motivated not only to adopt its products but also to extol the product’s benefits to others.
This new innovation is only possible today because of the underlying blockchain protocols themselves. In fact if you ask anyone in the field what is the killer app of blockchain technology, most will tell you ‘token sales’. They have become so popular on the Ethereum public blockchain they are ‘bloating’ one of the world’s largest and most widely used blockchain networks, damaging its utility for almost any other form of activity.
The token offering craze has pushed the hype around the blockchain to new heights, as recent ICOs such as Bancor ($150m) and Tezos ($200m) show. But we are already seeing the trend go mainstream, breaking out into the wider startup space where network effects are a fundamental requirement.
Now it’s important to stress at this point that most of the startups are raising ridiculous sums of money without any sign of viable products and no real utility to the underlying token. In large part they do so to get around securities laws and tap into what is seen as less sophisticated retail money. Take the ‘Useless Ethereum Token’, whose token sale website openly declares: ‘You’re literally giving your money to someone on the internet and getting completely useless tokens in return.’ This parody of the ICO craze still raised more than $70,000.
At first glance an $100 million raise for an early stage startup may sound insane. But consider that the tokens are not equity but a unit of exchange in a newly conceived economy. As the model matures and established VC norms are adopted this new funding model will become the most efficient use of capital we’ve ever seen for innovation.
To hold an ICO the startup must open source its code-base and create a foundation much like Linux. If things go wrong and the founding team fails to execute then the community of developers can actually fork the code, take it in a fresh direction and value is still retained — including the holdings of any investors.
Previously, 90 per cent of traditional startups simply went bust and took their ideas with them. In 2015, for example, we saw roughly $100bn of VC investment wasted. With the ICO approach those startups wouldn’t ‘go bust’. If the founding team weren’t delivering others could pick-up the open code and take it in a fresh direction.
Filecoin is seeking to attract sophisticated money managers with a new type of offering. The project, developed by start-up Protocol Labs, said that it will launch its ICO this month on Coinlist, a new platform it created with cooperation from AngelList, a service that connects startups and investors.
“The SEC is very well aware of this whole market and I think they’re going to appear at some point and will try to fix it,” Juan Benet, the founder of Filecoin, told CNBC. Rather than making crypto tokens available to anyone, Coinlist is open only to accredited investors — those making over $200,000 a year or have a net worth of over $1 million — gating out the less sophisticated investors who tend to drive more volatility. It also uses a new security protocol called SAFT (Simple Agreement for Future Tokens) that was designed to meet existing securities regulations.
Filecoin’s technology makes it easy for people to buy and sell unused storage space on their personal computers and uses blockchain technology to verify and track those transactions. The tokens being sold in the offering can be used to buy storage or they can be held as an investment.
Benet said Coinlist’s platform could help broaden the accredited investor base by enabling more compliant offerings. It has a standardized profile page for each sale, and a unified payment structure that can be used across the platform. It could also help attract more U.S. investors who are often blocked out from directly investing ICOs. “It makes the whole experience more accessible,” he said.
A venture capital firm called Blockchain Capital plans to do something that could change the way companies get funded — and perhaps even the way they operate. Instead of an Initial Public Offering, in which a company sells stock via a regulated exchange like Nasdaq, the San Francisco-based VC firm is making an Initial Coin Offering, selling its own digital token as a way of raising money for its latest venture fund. Anyone who buys a token will be buying into the fund. The firm announced that in the US, it will only offer its tokens to accredited investors, as the firm seeks to comply with US regulations. Overseas, any investor can buy the token, which will be called BCAP. The firm plans to release a detailed memorandum describing the offering on April 3, and the offering itself will likely follow after a few more weeks, through an organization based in Singapore. In Singapore, regulators do not consider this kind of digital token to be a security.
Take The Golem Project, which bills itself as “AirBnb for computers.” This rather elaborate effort aims to create a system that allows anyone to buy computing power from anyone else. But the added trick is that this system will operate outside the control of any one central authority, as a kind of online co-op. Golem recently offered up a digital token that provides a share of the fees generated when services are bought and sold on its network. This token is not quite a currency. And it’s not quite a stock. It’s a third thing when you thought there were only two.
The structures to help ICOs succeed and thrive in the mainstream are still evolving — like the Argon Group, which longtime Wall Streeter Stan Miroshnik founded to help oversee ICOs. Argon will bookruned the token offering on behalf of Blockchain Capital, meaning, in this case, that it is actually issue the token. “Our mission is to help this new capital market evolve,” Miroshnik says.
Certainly, Blockchain Capital’s coin offering is far less extravagant than an ICO from a distributed operation like The Golem Project. And it lacks the potential to truly change the nature of business in the way such a project can. But it could at least call greater attention to the complex dynamics that an ICO can bring.
ICOs are a very different animal from IPOs. Operating atop a blockchain — a vast ledger for recording digital transactions, like the one that underpins bitcoin — these coins have value in and of themselves. When you buy a coin, you’re not just buying something that represents a piece of an operation. You’re buying an actual piece. “It has some resemblance to how equity works,” says Peter Van Valkenburgh, a lawyer and the director of research at the Coin Center, a crypto-finance think tank. “But it works in a purer way.” Plus, these coins can help drive a truly decentralized operation like the Golem Project. Like many other ICO tokens, the Golem coin sits atop the Ethereum blockchain, which can run automated agreements called smart contracts. That allows the project to operate without a central authority.
The Blockchain Capital token is somewhat similar, in that it let individuals buy straight into an operation. The firm invests solely in, yes, companies exploring technologies related to bitcoin and the blockchain. Previously, it raised money for two traditional funds.
This ICO also means investors can readily sell their investments on a secondary market. In the US, only accredited investors can buy the coin at the beginning, but after a waiting period, they can offload their investments online, and others can buy in. “We call this liquidity-enhanced venture capital,” Pierce says, meaning that people can invest without locking their money up for years on end. In the long run, this kind of setup could attract more investors, and more money. Of course, as Van Valkenburgh points out, the secondary market for these coins may be subject to regulation.
Because only accredited investors can buy the coin in the US — with Blockchain Capital adhering, it says, to regulations that exempt it from registering the coins as securities with the SEC — the initial ICO won’t reach as many investors. And the fund certainly isn’t decentralized. Pierce and his partners will decide how to invest the money. Across the community that drives bitcoin and various other blockchain projects, the real hope is that ICOs can feed far more ambitious creations. Already ideas like Arcade City, a decentralized version of Uber, and Augur, a decentralized service for prediction markets, have raised money through ICOs. Ethereum itself was originally funded with an ICO, and similar blockchains continue to offer their own coins. The knock-on effect is enormous. A new San Francisco hedge fund called Polychain is investing solely in ICO coins.
As with any boom, there are bad actors to be found in the land of ICOs. Given bitcoin and the larger cryptocurrency world’s deep tradition of enduring bad behavior, it is not a surprise that ICOs are attracting humans of base intent.
ICO fraud and skullduggery is common enough that a quick search yields heart-melting headlines like “Ver Backed Qtum Founder Ran Previous ICO Scam,” “To everyone that bought into the Matchpool ICO, it looks like it was maybe a scam…,” and “A Digital Currency Scam is Misusing the Rothschild Family Name.” All of the articles are from this year to date. In the world of ICOs, fraud is never hard to find. Add in regular sums of incompetence that any new venture could fall prey to, and ICOs feel a bit Old West.
CryptoHustle makes the related point in a recent article that “ICO mania is likely due to early Ethereum adopters making serious returns after the last bull run.” Etherum’s run has certainly been staggering. If it is fueling the ICO craze, we could be in for a long cycle.
Regardless, the point doesn’t mean that cryptomarkets are as they should be. That ICOs would eventually get ahead of themselves and bubble like so many young technology niches was predicted at least since last October. How long the good times will last isn’t obvious. But the correction will come, as always, and when it does, we’ll see which cryptos have a real shot.
Would you care to invest in ICOs like Gnosis, a prediction market where users can bet on outcomes of events such as elections? Or in ZrCoin, a project to produce zirconium dioxide, used to make heat-resistant alloys? How about an “immersive reality experience” called “Back to Earth”? On April 24th Gnosis collected more than $12m in under 15 minutes, valuing the project, in theory, at nearly $300m.
As Gnosis shows, such offerings can sell out quickly. The crypto-currency cognoscenti made a lot of money investing in bitcoin and other tokens and have cash to invest (as The Economist went to press, the value of all ether in circulation was nearly $5bn). Less popular projects offer incentives for buying early or a lot. “Back to Earth”, whose ICO launched on April 26th, wants to raise 750 bitcoin (almost $1m) by selling StarCredits. Investors who buy coins worth 0.75 bitcoin or more get a special “Golden Ticket”, entitling them to special content and, later on, free StarCredits.
But the claims in white papers are mostly unaudited. ZrCoin plans to build a factory in Russia to extract zirconium from industrial waste; cameras on the site are supposed to let investors monitor progress. ZrCoins are backed by the zirconium to be produced. But as in many ICOs, it is unclear why the funds are not raised in conventional ways. And since most ICOs have no link to any particular jurisdiction, it is hard to see what investors could do if issuers abscond with their money. Often they have immediate access to the funds raised.
EOS for instance, which was heavily criticized for its controversial Token Purchase Agreement, gained popularity amongst investors within the cryptocurrency market for its infrastructure that provides an efficient, scalable and flexible ecosystem for decentralized applications and smart contract-based platforms. Most ICOs including EOS emphasize prior to their ICO campaigns that US investors can’t participate in token sales and that the native tokens of ICO projects do not have any intrinsic value. As an example, the Token Purchase Agreement of EOS read: “As mentioned above, the EOS Tokens do not have any rights, uses, purpose, attributes, functionalities or features, expressed or implied. Although EOS Tokens may be tradable, they are not an investment, currency, security, commodity, a swap on a currency, security, or commodity or any kind of financial instrument.” Admitting that its native token does not have any purpose and uses and therefore can’t be considered as an investment, currency and a commodity is not necessarily a positive move for marketing.
Still, before ICOs fulfil this promise, they may well have to endure a cycle of boom and bust. Some liken the ICO craze to the South Sea bubble in the early 18th century in Britain, when promoters raised funds for companies promising the “transmutation of quicksilver into a malleable fine metal” or a “wheel for perpetual motion”. Prices soon fell, in particular after Parliament in 1720 passed the “Bubble Act” to rein in “undertakings of great advantage”. But the sorry episode was a step toward some rather useful innovations: the modern joint-stock company, for example.
Like in the late 1990s, the dotcom era. Angel investors and venture capitalists bought stakes in dotcom companies for a few cents before they went public, unloaded them for double and triple digit dollars the day these companies made their debut on Wall Street. We all know what happened in that case — these early investors made tons of money, while investors who joined the party late lost tons of it. Now money is easy again, and hot IPOs are back in fashion.
Within 11 minutes, Gnosis had raised the $12.5 million, led mostly by programmatic pooled “bidding rings,” and sold only 4.2% of its allotted 10 million tokens. The final price, $29.85, gave their project — which had little more underlying it than a 49-page white paper and a few thousand lines of open-source computer code — a valuation of $300 million. In two months, GNO coins were trading at $335 each, and Gnosis was suddenly worth $3 billion, more than the market cap of Revlon, Box or Time Inc. Köppelmann’s stake alone is, in theory, now worth about $1 billion. “It’s problematic,” admits Köppelmann, who stammers and sighs repeatedly, in seeming embarrassment. His best defense for the valuation: There’s a lot out there that’s far worse.
The market capitalization for these virtual issues has surged 870% over the last 12 months, from $12 billion to over $100 billion. (This number is a moving target, though, since a 30% daily market plunge or gain isn’t out of the ordinary.) That’s more than six times the rise in stock market capitalization during the dot-com boom from 1995 to 2000. A lot of this total gain comes from Bitcoin, the original digital asset — created out of an artful blend of cryptography, cloud computing and game theory — which is up 260% in 2017 alone. The total value of Bitcoin now exceeds $40 billion, despite years of shady characters, fraud, theft and incompetence (including the Mt. Gox meltdown, which took almost $500 million with it) and despite the fact it has no intrinsic value — not even the promise of a central government or a precious metal mined from the ground.
So suddenly anyone with a digital idea can launch a coin to go with it. There are now more than 900 different crypto-currencies and crypto-assets on the market, with another launching pretty much every day. On June 12, Bancor, which plans to create a new reserve cryptocurrency, offered 50% of its total tokens and raised $153 million in under three hours, setting the record for an initial funding amount. The very next day, an entity called IOTA listed a token designed for Internet of Things micropayments and immediately fetched a value of $1.8 billion. A week after that, a messaging platform named Status launched its coin offering, raising $102 million.
In a gold rush, it’s good to be selling the pans. Ethereum’s value has skyrocketed more than 2,700% in the last 12 months, to $28 billion, or $300 per token. Of course, on the way there it has flash crashed to 10 cents and hit as high at $415. Bitcoin has been historically just as volatile, trading from $31 to $2 to $1,200 to $177 to its recent $2,500, as armies of day traders try to time something that has all the predictability of a roulette wheel.
Of course, that hasn’t stopped a slew of websites and Facebook groups from popping up, full of endless bragging of crypto-conquests, including token purchases financed with credit card debt. Or hucksters from trying to get people to put their retirement money in this stuff, via Ether and Bitcoin IRAs. Every new coin offering presents another chance to translate a flaky business into an absurd valuation.
These pioneers have certainly unlocked a better way to raise money and create a network effect. Why grovel before Silicon Valley venture capitalists or deal with federal regulators in the public markets when you can attach a token to your idea and have speculators throw money at it and then bid it up? These initial coin offerings have raised more than $850 million, from Brave Software’s lofty “Basic Attention Token” (which sucked in $36 million in 24 seconds, at a $180 million valuation, on the promise of using blockchain technology to fix digital advertising’s deep problems) to the more basic Legends Room (a coin that gives users VIP privileges at a Las Vegas strip club).
If this all sounds familiar, it’s because it is. The same dynamics — companies with more concept than concrete, day-trader speculators, wild volatility, Dutch auctions, instant fortunes created out of thin air — were ubiquitous in the first internet bubble. As was collapse: In 2000, $1.8 trillion in internet stock market value evaporated, and unless you think a prediction-market concept is instantly worth $3 billion, history will repeat. Ether is both a building block and the future description of what’s going to happen to most of this “value.”
Still, we’re past the tulip stage. Yes, that first dot-com bubble was ridiculous, but it also gave us enduring companies like Amazon, Google and eBay. And, yes, scores of foolish day traders and IPO junkies got crushed, but lots of smart, early players got very, very rich. That history is repeating right now, too.
To best understand how cryptocurrency works, think about videogames. You have a virtual world, and within this realm, you can often earn virtual currency, which can then be redeemed for rewards within the game — extra armor, more lives, cooler clothes. It’s the same here, except that it’s rooted in blockchain technology and (theoretically) you can either convert the play money into the real thing or deploy it for actual goods and services inside the entity that spawned it.
The digital currency ecosystem has had a crazy year. The Bitcoin market capitalization has grown from $11 billion on June 5, 2016 to almost $47 billion USD on June 5, 2017. “Bitcoin is accepted by 100+ companies including Microsoft and Dell,” says John Paul McCaffrey. “As new cryptocurrencies develop it is very important to be able to pay for products and services through a variety of merchants in order to sustain current coin holders and attract new ones. It might be shocking to learn that there are a number of car dealerships across the country that accept Bitcoin as payment. Buying these currencies is as easy and downloading the Coinbase app on your smartphone and creating an account. To set limits on your purchases you can use the web-based app GDAX, provided by Coinbase.”
Positive events were much broader, including Japan recognizing the coin as a legal payment method, Russia reversing their prior stand against Bitcoin, and Australia adjusting its policies to remove a double taxation problem for those accepting digital currencies.
Most ICOs today are marketed as ‘software presale tokens’ akin to giving early access to an online game to early supporters. In order to try to avoid legal requirements that come with any form of a security sale, many ICOs today use language such as ‘crowdsale’ or ‘donation’ (ITO — initial token offering) instead of ICOs. The token can represent some sort of value or be of value itself. An ICO might involve attributing equity to a token so that ownership gives you voting privileges and access to dividends, which is what the now infamous fund raising effort of The DAO did. Their use case for a token is the most similar to that of an IPO, however, the majority of use cases are for something different. The typical use case of a token issued in an ICO is the creation of an asset that gives you access to the features of a particular project. Instead of having cash or Bitcoin as the way to pay for goods and services from the ICO offerer, you use their token. You can think of these tokens as being similar to a store specific loyalty point, something you purchase with a general purpose digital currency and use at a specific location.
Because these tokenized loyalty points are put onto a public blockchain, the points are not limited to being traded in exchange for services within the platform, but instead can be traded anywhere. If there is enough activity within a given ICO’s environment, their tokens will become globally traded on the various exchanges that handle cryptocurrencies. Successful ICOs are the product of careful thought on economics and game theory, and as a feature they intend that their tokens will increase in value as the volume of the activity on their platform rises.
As such, these loyalty points now have a variable value, based off of market perception and growing use of the platform. This creates a very interesting incentive mechanism because now the users of the platform who are receiving the tokens have incentives to bring other users to the platform in order to increase the value of their tokens.
Combining a token with an initial offering through a crowdsale allows you to build an international network of early adopters and investors who will actively work to educate and spread awareness of your project. Unlike a traditional crowdsale on a system like Kickstarter, where the users who invest typically only have an incentive to invite others to enjoy the product with friends and family, the users who participate in a token crowdsale have the additional incentive of a gain on the value of their asset.
So what about the use case for decentralized applications? This is not as easily applied for typical companies. This assumes that you want to create an application that, instead of being centrally hosted by a company, is hosted in a decentralized manner. The main value of this is that, since there is a reduction in intermediaries, users have more control of the application and it can be faster and cheaper to use the application for certain use cases.
The Storj system is a bit complex, as it handles two commodities — spare storage space and unused bandwidth of those providing that storage. Unlike Uber, where there is a central company organizing everything, Storj is completely decentralized and all the funds go directly to the storage holders. Lacking a centralized service ensuring that everyone is behaving correctly, there has to be some means of enforcing the agreed upon behavior. This is where smart contracts enter the picture.
The easiest way to think about a smart contract is allowing for the movement of money, without a third party involved, based solely on data input that is defined when the contract is made. Since Storj coin is built atop Ethereum they have access to a Turing Complete programming language for smart contracts, which is the computer scientist’s way of saying it’s a full featured language.
Storj smart contracts require that funds be held in escrow for users to participate in the system, either as storage providers or renters. If a user tries to cheat the system in some way, the smart contract can drain the funds from the escrow account of the cheater and return it to the user affected by the cheating. By leveraging the Storj coin, the value of these smart contracts become more predictable and correlated to the Storj platform, instead of being subject to the volatility of general digital currency markets such as Bitcoin or Ether.
Storj’s approach to building a company working on top of an infrastructure that is built with a team of Storj Labs developers in addition to the open source community is a very common approach for decentralized applications. This is done to create a more transparent environment for the infrastructure and to create an open platform that encourages other companies to build on top of and contribute to the system.
While Storj & Ethereum participated in crowdsales for the initial offerings of their tokens, they are careful to never use the term ICO, fearing that it is too closely associated with an IPO. Alan Cohn, co-char of Steptoe & Johnson LLP’s Blockchain and Digital Currency practice and head council to the Blockchain Alliance, explains that by calling an ICO a token crowdsale, it helps investors understand that they aren’t purchasing equity or a security, but an entirely new asset class.
Another unique sign that ICOs are becoming mainstream is Kik’s Kin coin. Kik is a chat platform popular with U.S. teens with over 300 million users. Ted Livingston, Founder & CEO of KIK, explains, “A cryptocurrency creates a new way to economically align a large group of developers to work together to create a new ecosystem of digital services that are compelling for consumers, and fair and lucrative for developers. Doing an ICO is a new and exciting idea, and it took some time to run experiments like the Kik Points pilot program to prove that we could build an economy inside of Kik…[T]his was a new and viable way to monetize a community — instead of showing ads or selling items to our users, we could grow the value of a cryptocurrency with a larger community.”
Instead of relying on an ICO to raise money in order to build a product, Livingston sees this as a way to reduce friction for goods and services that already change hands via Kik, as well as creating the foundation for exciting new projects.
Sources including the Wall Street Journal have revealed that the ICO market has surpassed the $1 bln mark, with some of the recent ICO campaigns including EOS, Bancor and Tezos successfully raising hundreds of millions of dollars. Tezos, Bancor and EOS alone have raised more than $559 mln over the past few months, offering unique infrastructures and platforms built on top of the Ethereum protocol.
Despite the bubble-like nature of the ICO market, billionaire investors such as Tim Draper, who backed the ICO of Tezos and Bancor, stated that investors are focusing on the ICO market because of “a sea change as big as the Internet” it can bring in the near future.
Funds raised by ICOs far outstripped venture capital investment in start-up companies, according to the report by equity and research firm Autonomous. It found that the level of ICO investment rose from $26 million in 2014 to the enormous sum of $1.27 billion in the first half of 2017.
Bancor, the blockchain startup that raised $147 million in an initial coin offering (ICO) two months ago, announced recently that it has added the first member to its currency-liquidity network. That new member is Invest.com, an online financial advisory, which will be launching a prediction market called Stox, with its own cryptocurrency, STX, using Bancor’s “smart token protocol.”
Bancor eventually hopes to have thousands, even millions, of cryptocurrencies using its protocol, which runs on the Ethereum blockchain. Just as YouTube has allowed anyone in the world to create their own broadcasting channel and embed their video anywhere, Bancor allows anyone to create their own cryptocurrency token and operate it independently of a third-party exchange, Bancor cofounder Eyal Hertzog told VentureBeat.
The real promise of Bancor is that it hopes to inject a high level of liquidity into the cryptocurrency market. Users of currencies running the Bancor protocol can liquidate those currencies into Ethereum’s native Ether tokens or any other Bancor-based currency instantly. As anyone who has been watching cryptocurrency prices crest and fall over the past month knows, the value of these tokens is highly volatile. Bancor’s promise is that it will add a good deal of stability to any currency on its network by ensuring tokens are bought and sold at a specific price (a price that’s not set by investor bidding). “This eases the rise and fall [of a currency] because the price is only affected by the volume someone is buying and selling” as opposed to external forces, Hetzog said.
And while cryptocurrency exchanges currently take a cut off any trade and can take a long time to finalize that trade, Bancor’s protocol ensures the trade occurs immediately and doesn’t take a cut. In fact, Bancor, the company, doesn’t handle trades at all — all transactions are handled automatically via smart contracts running on the Ethereum blockchain.
In attempting to create “one global network” for currency exchange that is stable and frictionless and open to any player, the company hopes to fulfill the vision of economist John Maynard Keynes, who proposed a supernational currency during World War II for international trade. Keynes called his proposed currency “bancor.”
When we asked Hertzog about his longer-term vision for what the Bancor network could accomplish, he said much of how it evolves will be determined by users. “Like YouTube or blogs — no one knew when they started what they would become. We are looking forward to learning from our users and don’t want to tell them how to use the platform.” Bancor’s vision for currencies is certainly intriguing, but today’s announcement doesn’t give much idea of how popular the platform could become, and a mammoth fundraise doesn’t guarantee success. It will be interesting to see how far this startup goes.
Meet some other interesting ICOs:
— Augur is created to be a decentralized prediction market where people can bet on the possible outcome of events — a betting/forecasting platform of sorts. Augur has practically created a betting platform where you can bet on “everything from elections to the destruction of our solar system.” if your forecast/prediction is correct, you’ll earn rewards in the form of Augur’s Reputation (REP) tokens. Augur’s ICO helped the firm to raise more than $5.2M in a token sale, with $2.5M in the first three days. Augur has already rewarded its early investors as its REPs currently trade around $26 and the price may continue to rise as more people come on board to the betting platform.
— Chronobank is another cryptocurrency startup that has found a way to fund its business by holding an ICO. Chronobank is simply the Uber of recruitments as it works on creating an ecosystem where freelance projects are bought and sold with cryptocurrency. When the ICO ended, ChronoBank had raised a total of $5.4M collected in seven cryptocurrencies and USD. Chronobank now has a market capitalization of more than 5,400BTC. The firm’s CEO, Sergei Sergienko notes that “we have the funds we need to launch a successful platform and forge the relationships to make ChronoBank a major disruptive force in the recruitment industry”.
— Agrello is yet to hold its ICO, however, it has the potential to become one of the biggest success stories in the cryptocurrency world for smart investors. Agrello is simply a platform for building legally binding smart-contracts, using AI without having any prior legal skills or knowledge of coding. The Agrello token is called Delta Δ and it is being offered with Tier 1 at 0.0001Ƀ, Tier 2 at 0.00011Ƀ, Tier 3 is set at 0.00012Ƀ, and Tier 4 is set at 0.00013Ƀ. One of the key factors that hint at the potential success of Agrello, is its application across a wide range of industries. For instance, Agrello recently inked a partnership deal with Finnish manufacturing giant INCAP, to provide smart agreement prototyping for INCAP’s labor management process. Agrello also has a deal with ViewFibn to develop a digital identity engine.
— If you want to gain a diversified form of exposure into the cryptocurrency market, cryptofunds can provide you with a smart tool to access these markets. For instance, eToro’s CryptoFund, provides access to six unique cryptocurrencies in order to offer a balanced exposure to the cryptocurrency market. The diversification of the fund allows investors to be uniquely positioned to record gains across multiple cryptocurrencies and it protects them against massive losses in any single cryptocurrency.
— If you would like to invest directly in startups operating in the cryptocurrency market, you may want to consider investing in Pantera Capital. The firm seeks to provide VC funding to startups working in the blockchain and cryptocurrency industries. By investing with a firm such as Pantera Capital, you’ll get a chance to profit from price gains in cryptocurrencies and profit from the success of the firms behind such cryptocurrencies.
— Token-as-a-Service (‘TaaS’), dubbed the “first-ever” tokenized closed-end fund (CEF) that allows investors to capitalize on the rise of blockchain markets, was co-founded by Blockchain protagonists Konstantin Pysarenko, Ruslan Gavrilyuk, Dmytro Chupryna and Maksym Muratov. Together with team members from the United States, China, Poland, South Africa and the Ukraine, fledgling startup TaaS with offices in Kiev and San Francisco intends to offer a “new way” to participate in and benefit from capital raising, fund management and cryptocurrency investing. Pysarenko told Forbes that in terms of the scope of investment to be pursued they intend to be “an active player” across blockchain markets, investing in cryptocurrencies and tokens. It is understood that they are interested in investing in “blockchains built by progressive-thinking teams” that solve crucial real-world problems, or are pioneering and stretching the limits of blockchain.
— One of the biggest and most rapidly funded, TenX, raised $80 million in just 7 minutes! I know that sounds like the stuff of fairy tales, but it’s real and we can take away some valuable entrepreneurial and marketing lessons from these ICOs.
There are a few key fundamentals that these blockchain companies are leveraging in their ICOs to pull in those kinds of numbers:
1. Timing Is Everything. It doesn’t matter how great your startup, team, product or service is — if it’s launched at the wrong time, it could still flop. TenX timed the launch of their ICO perfectly. They are riding the upward wave of the cryptocurrency market while doing everything else right.
2. Solve An Actual Problem. The most successful fundraising campaigns in history have been the ones that tackled a huge problem. In the cryptocurrency world, the big problem is that people can’t actually spend the digital currency in 99% of businesses worldwide.
3. Make Sure There Is A Market… Then Disrupt It. You don’t want to launch a fundraising campaign and solve a problem in a small industry. TenX took the path of merging fintech, blockchain and banking, and capitalizing on the rise of a massive global industry. Then they disrupted that industry.
4. A Well-Researched Pitch Is Still Fundamentally Important. Even if you have the best strategy in a hungry market, you still need a well-researched pitch. In the cryptocurrency ICO world, that is called a whitepaper. This is a document that the ICOs use to pitch and explain their concept. A whitepaper is similar to a Kickstarter landing page, but in the ICO space it is more conservative, less sales-focused and explains the technical side in more detail. The community is hungry for real, authentic concepts and they will shy away from cheesy sales tactics.
Less than a week after the SEC said that it may regulate certain crypto token sales, better known as ICOs, Singapore has followed suit to say it too will regulate offerings that are deemed to be securities. Already a global financial hub, Singapore has developed into a destination of sorts for ICOs, with the likes of TenX ($80 million), Golem ($8.6 million) and Qtum ($15.6 million) among those to have held ICOs from the country. In an era of uncertainty around the way traditional financial regulators will deal with the burst in alternative funding via ICOs, Singapore’s central bank’s move to tokenized its currency was seen as a positive validation by many in the crypto industry.
The takeaway from the six point bulletin is that MAS will regulate an ICO offering if it looks like a product that falls into Singapore’s Securities and Futures Act, i.e. if it behaves like a stock or any other security. MAS will also regulate exchanges and other services that enable post-ICO coin trading, the note said.
It all sounds simple enough, but the judge of what constitutes a ‘security’ is down to the regulator itself, and at this point it isn’t clear exactly what the considerations are.
The most pertinent piece of advice from MAS is an obvious one. Any company or individual considering an ICO that involves Singapore should “seek independent legal advice to ensure they comply with all applicable laws, and consult MAS where appropriate.”
Beyond running an ICO for a business that is located in Singapore, MAS could also take interest in ICOs that accept money from buyers who are Singaporean or those who are based in the country.
So, far from doom and gloom, Singapore’s financial regulator has come out with an acknowledgement of the rise of ICOs in its domain and, by saying it will regulate certain offerings, it has eased some uncertainties around the legal status of this fast-growing fundraising option. Now we’ll have to wait to see which, or indeed whether any, upcoming ICOs fall into its securities basket and how they are dealt with.
Already the MAS disclosure has been welcomed by one industry body, ACCESS, which is comprised of representatives from Singapore’s cryptocurrency and blockchain industries.
“ACCESS welcomes today’s statement from MAS. They recognize the wide variety of digital tokens available and that not all fall under the remit of the SFA. We appreciate their clarification and reiteration of their position on virtual currencies,” a spokesperson told TechCrunch.
MAS previously issued advice on cryptocurrencies like bitcoin and ether, which is used for ICOs, but it released this new note in response to the way crypto has evolved into a mechanism for raising funding.
“MAS’ position of not regulating virtual currencies is similar to that of most jurisdictions. However, MAS has observed that the function of digital tokens has evolved beyond just being a virtual currency. For example, digital tokens may represent ownership or a security interest over an issuer’s assets or property,” it wrote.
Some days before The SEC has concluded that the digital currency financing events will be regulated as securities, meaning unregistered offerings could be subject to criminal punishment. To reach its findings, regulators evaluated an offering facilitated by “The DAO,” which resulted in theft by hackers. The report concluded, “that issuers of distributed ledger or blockchain technology-based securities must register offers and sales of such securities unless a valid exemption applies.” The SEC said its report served to remind “investors of red flags of investment fraud, and that new technologies may be used to perpetrate investment schemes that may not comply with the federal securities laws.”
The SEC will not be pressing charges in this particular instance but has indicated that this will serve as a warning for future offerings. Those “participating in unregistered offerings also may be liable for violations of the securities laws.”
There is an argument to be made that a dearth of regulatory oversight is actually good, as it allows the ICO market to iterate and innovate quickly. It is a reasonable(ish) argument and likely technically correct, but that doesn’t mitigate the potential for unsophisticated investors to be preyed upon. Caveat emptor and moral hazard are fine arguments in favor of no rules regarding ICOs and cryptos, but if the market wants to keep growing, it will need to do more to attract consistently larger pools of capital.
Earlier, the people behind a software project called Tezos raised more than $230 million in a roughly two-week fundraiser. But they weren’t selling shares in a company, or even working through a crowdfunding platform like Kickstarter. Instead, the group, which plans to set up a digital ledger system and cryptocurrency similar to bitcoin or ethereum, organized what digital finance research firm Smith and Crownsays was the largest so-called initial coin offering in history. They offered backers virtual tokens that will be usable as currency on the platform once it gets off the ground, which is expected to happen later this year, in exchange for bitcoin and ethereum.
“What people did is they made a contribution to an open source project that they believe in,” says Johann Gevers, a Switzerland-based digital finance entrepreneur and a member of a Swiss foundation created to support Tezos. “This is not a traditional investment where people get equity in a company and they have dividends and voting rights and so forth — there is absolutely no relationship like that.”
Some projects, like Tezos, seek to create their own blockchains–the cryptographically secure shared ledgers that log transactions in digital currencies–and offer improvements on those used by existing coins. Others offer services geared toward users of cryptocurrencies, like easy-to-use online trading systems and banks for the new money systems. And still others offer digital tokens that can be used in the tangible world. In June, a project called Primalbase raised more than 3,000 bitcoin, or about $8 million at current exchange rates, in just 24 hours, selling virtual tokens that grant access to a forthcoming chain of coworking spaces.
There’s just not a lot of regulatory clarity on what kinds of claims projects themselves can make, and people who are participating in these types of opportunities need to be very cautious, and of course not contribute or invest more than people can afford to lose.
And in July, at least three post-ICO projects — commerce platform Swarm City, casino Edgeless, and blockchain platform Aeternity — lost a collective 153,000 ethereum, now worth about $30 million, after hackers exploited a bug in common wallet software. Each project said it would continue to develop its platform even after the theft.
Jamie Burke, the founder and CEO of blockchain-focussed VC firm Outlier Ventures, calls ICOs “the blockchain ecosystem’s killer app.” The way Burke sees it, ICOs are finally lowering the barriers to entry for technology investment, as whoever has some cryptocurrency can join the party; more than that, coins’ speculative potential is allowing open-source projects to raise more funds than ever before. “The point is that now, for the first time ever, open-source initiatives can be profitable for investors,” he says. “Previously, they were relying upon donations and they were inherently unprofitable — people would just do them for an ethical goal. Now there is a financial incentive for people to participate.” “Most of the projects which have launched ICOs are poorly designed and won’t scale,” he says. “But I look past that: I still think we have the ability to kick-start this new economy.”
Some of the more obvious security problems are being addressed by the crypto community at large: it has been recommended that funds from ICO be locked in an escrow mechanism — giving access only to limited sums after milestones have been reached — in order to prevent crypto heists. And Ethereum’s wunderkind guru Vitalik Buterin has turned to game theory to suggest some tips for designing fairer ICO auctions, such as as splitting them up in smaller, spaced out sales over time.
For the time being, ICO’s real challenge is whether it can thrive without being a pain in the side for the blockchain ecosystem itself. ICOs are likely behind the recent spike in the value of ether — with investors buying the cryptocurrency in order to take part in token sales; ICOs might also be behind ether’s sudden 30 percent drop in value, as many ether-loaded projects are converting their ICO-generated ether into fiat currency to pay their staff.
“There is no question that many of the ICO’s receiving investments now will not succeed. This is not to suggest that they are scams necessarily, but the fact remains that many new ventures in any sector fail, and this will be the case with blockchains as well.” “When a ‘company’ raises $150 million solely with a white paper, you know something is definitely wrong,” Hyun Lee, a growth manager at Qminder told me via email. “It’s dumb money.”
Andrew Zimine, CEO of Exscudo, a “gateway between cryptocurrencies and the traditional economy,” doesn’t mince any words: “The situation when some entity is traded on the market without any relation to reality reminds us of the derivatives of the U.S. mortgage crisis, the ‘popping’ of which affected the world economy for a few years. So when the market sees the light about real values, this bubble will pop. And that is not a question of years but of months.”
So, should you launch an ICO? If you have a real company and a real product — or one in the making — an ICO can be a great way to raise significant amounts of capital quickly. But (and this is a completely personal piece of advice): I would take the funds raised and transfer them to a more secure form of storage very, very quickly. Although cryptocurrency fanatics tend to look down on government-backed currencies like the U.S. dollar, calling them “fiat” currencies, they are generally a much more stable container for wealth at this point.
Elena Masolova wrote great thoughts regarding this: “In short, the technologies of 1993 have met with the hype of 1999. I do believe in cryptocurrencies, but I’m a bit cautious about ICOs. However, there are good ICO investment strategies as well.
1. Cryptocurrencies are here to stay, they serve as the store of value. It is not a bubble, but a part of the global economy.
2. In May 2017 there were only 12 mln cryptocurrency wallets (it is a laughably small amount). There will be at least 300–400 mln wallets worldwide. As every new investor brings money and buys currency (while the supply is limited), it is the first fundamental growth factor.
3. The growth of daily trading volumes and the currency rate growth in January 2017 was due to the fact that first professional players (hedge funds) had come and each of them had brought 50–100 mln dollars to play with. 10–50 times more institutional investors will enter the market, and it is the second growth factor.
4. In March 2017 Japan legalized Bitcoin, and the daily trading in yen reached 47%. In June 2017 India did the same. Other countries will follow like dominoes, and it is the third growth factor.
5. The ecosystem is half-closed, and it is the fourth factor. Withdrawal to fiat (paper money) is possible, but usually, if an investor has earned 10X on mining in a year, and an average 8X return on one ICO in 2 months (calculated as 50% discount at pre-ICO and historical fourfold growth after public offering), he won’t withdraw funds.
6. As a consequence of these factors, the volume of cryptocurrencies’ in circulation will grow from today’s $80 billion to $1–10+ trillion.
7. Ethereum is catching up with Bitcoin and will leave it behind. The major driver is that most ICOs use it.
8. It is possible (and very likely) that 2–3 new cryptocurrencies will emerge and enter the top 5.
9. The daily volatility up to 30% is normal. Cryptocurrency markets are sometimes manipulated (though it is getting more difficult for the leading currencies), token price is often manipulated. Read as: a private investor can make long-term investments, but should by all means avoid short-term intraday trading.
10. There are few professional traders, the spreads can be seen with a naked eye, but this market inefficiency slash opportunity to make money will quickly disappear.
11. The people who earned 8–10X mostly due to the natural market growth in the first half of 2017 contribute this success to their own investment genius. The illusion of infallibility leads to a known end.
12. Combining pre-IPO valuations with pre-seed stage is an interesting concept. “Let’s start a company with a public offering!”
13. Most of this autumn’s ICOs won’t manage to raise enough funds.
14. Project founders have inflated expectations. Everyone wants to become Tezos ($230+ mln) and Bancor ($153+ mln), but I have analyzed data on 50 major token sales and found out that only 5 projects have attracted 49% of all funds, and 10 projects have attracted 61%.
The average round for a project in 1–5 positions comprised $125 mln, $33 mln for 6–10 positions, $13 mln for 11–48 positions (not much already, and the average round will fall dramatically).
15. The number of ICO projects is growing much faster than the volume of new money in the market. Bear with me. 20 companies per week is about to change to 200 per week (which over 3 months gives roughly 2000 companies). Each of them wants to raise at least $10 mln which gives us a target of $20 billion. So far the ICOs have raised $1.2 billion, the 15X growth does not seem realistic.
16. The worst factor. This is a highly speculative market, but everyone thinks that he/she is not “the last idiot”.
17. The best factor. The industry is seeing huge influx of talent and capital. Hundreds of entrepreneurs, coders, investors I know have joined it. Gordon Gekko was right — “Greed is good”.
18. After market correction (put mildly) only the strongest players will survive. They will join the major league of tech companies like Google, Uber, etc.
19. I retract my prediction that we will see a $1 billion ICO. We won’t. But 5–10 companies of this autumn will surpass $1 bln capitalization after crypto exchange listing.
20. Here is the first working strategy: pool your capital and invest in the best projects at the pre-ICO stage with a discount. Keep in mind that there will be a 2 months lag before public offering of the token. Ask yourself constantly: “Am I the last idiot?”
21. The second one would have worked 3 months ago — to launch your own project. If you haven’t done it yet, forget it.
22. The third one. To invest in projects, which you would have invested anyway according to classic venture rules — projects with a prototype, earnings, traction, and an assembled team (such projects are rare now :)
23. Still, quality infrastructure projects do exist. And their tokens show the 26X rate growth after listing at crypto exchanges.
24. I support some of the 3rd type projects as an investor (e.g. TokenStars). They would do quite as well without an ICO. That is, ICO is just a fundraising tool. Just what it should be.
25. The technologies of 1993 have met with the hype of 1999. Many tech barriers exist yet, but the concentration of brains (and now the concentration of capital, as well) makes me believe that the community will solve everything.
26. Crypto-anarchists have some mind-blowing ideas. I like “LLC in the cloud” — a legal entity beyond any jurisdiction, beyond taxes and laws. It is nowhere and everywhere at the same time.”
Regarding us, Chris Skinner, one of TOP5 influencers and predictors since the beginning of fintech industry, united best specialists in blockchain-area, and Life.SREDA team as an investment-professionals, announced The BB (banking on blockchain) Fund. (You can read more on CoinSpeaker, TheMerkle, CoinDesk, etc.)
The WhiteMoney project, a system of payments between legal entities based on the distributed blockchain network, emerged as a winner in InspiRussia hackathon — touted as the largest blockchain event in the country. InspiRussia in Kazan (Islamic Republic of Tatarstan consider introducing blockchain for public administration with Life.SREDA) is a continuation of InspirAsia established by Life.SREDA VC, a Singapore-based fintech-focused venture capital fund. The event held at the Innopolis University was also backed by Sberbank, Microsoft and QIWI. The blockchain-focused event featured developments in sectors such as online debt transactions, payment processing technologies, blockchain based smart contracts, payments with no intermediary banks, communication using bots, micropayments using bots amongst others. The 300 global participants, ranging from as young as 7 years old to 53 years old, were given 24 hours to assemble a team and create working prototypes. The teams then made a three-minute presentation in front of a jury.
Later Russian payments service provider QIWI (NASDAQ: QIWI) has purchased fintech accelerator InspiRUSSIA which mostly focuses on developing blockchain-based solutions. As reported by TASS, the amount of the deal remains undisclosed. “QIWI has acquired full ownership of InspiRUSSIA. We have a QIWI blockchain division focused on projects in the area for external markets. The main purpose of the acquisition is to further develop blockchain projects, and to reinforce the team that would engage in technological development and marketing of the technology,” QIWI’s statement reads.
Among the fintech sectors, the most interesting are those not related to payments and remittances: trade finance, stock issue, and trade, solutions for effective workflow between banks and their corporate clients. But in reality, main activities account for remittances or the establishment of new banking standards through various associations. Singaporean BAASIS with their BAASIS ID open API sells client identification service to fintech startups, telecom operators, messengers and e-commerce players from different countries.
But the most interesting (and perspective) blockchain-related spheres are strictly outside of the cryptocurrencies’ realm — they include solutions for healthcare and logistics industries, land sale support, governmental and corporate workflow solutions. Estonia, a global leader in e-government, has recently launched a unified medical record database, accessible to hospitals and insurance companies, in partnership with the blockchain startup Guardtime. Prescrypt works along the same lines in partnership with SNS Bank and Deloitte in the Netherlands, BitHealth — in the United States. Swedish government together with ChromaWay and a partner bank is going to test blockchain smart contracts for a land registry, which are to simplify the life of buyers, sellers, and banks, using land as a collateral on regular basis. BitFury launches a similar initiative in Georgia, whereas BitLand enters Ghana and Honduras (and have plans to expand to Nigeria and Kenia). UAE launches Blockchain strategy to become paperless by 2020. The state of Delaware, hosting numerous companies from other states and countries, is to introduce a blockchain-based system of company registration, an issue of shares, recording of Board Resolutions, redistribution of shares as a result of purchase and sales transactions (Singaporean Otonomos is developing a similar solution for a number of countries). British Everledger assists banks, insurers and open marketplaces in a reduction of risk and fraud by digitally certifying diamonds, art objects and high-end bottles of wine.