Democratization of Investments with Crypto-Assets and the Need for Independent Ratings
Innovation triggers great excitement among investors. Excitement, however, is a bad investment advisor. As the dot-com boom has already shown us some twenty years ago, most of the firms that see the light of the day during such a period of excitement will fade away quickly once the party is over, and so will their finances. Yet some will make it, and some will even become the leading firms of the future. Just take the case of Amazon or Google, who were founded in the midst of the dot-com hype. Today, the companies are worth hundreds of billions of dollars, and they constitute two of the top three most admired companies, according to a survey conducted by Fortune.
The current boom is about platform businesses and blockchain-backed Initial Coin Offerings (ICOs). It takes no crystal ball to predict that most of the mushrooming ICOs are not built to last. Yet it would be a severe mistake to blindly discard the innovation behind coin or token offerings, as this innovation makes an extremely important and valuable contribution towards the democratization of financial investments. So there are good reasons to believe that some of the crypto companies that emerge today will be the Amazons or Googles of the future.
Until recently, it was difficult or impossible for the general public to participate early on in major innovations. That space was reserved for venture capitalists during the seed stages and private equity firms during the expansion stages. Coin offerings now drastically change this world order, simply because the underlying blockchain technology slams issuance, transaction, and coordination costs. Today, virtually anybody can participate in new ventures by buying a few dollar worth of coins and holding them in their digital wallet. This is indeed a great innovation!
The Need for Objective Information
However, this democratization of financial investments also poses significant risks. Small investors generally know much less about important issues such as the viability of the business case, the quality of the management team, and the governance of the issuing firm. Finding and interpreting that information is difficult and costly, and it is generally not worth the trouble for an individual who plans to invest only a few dollars. But without proper due diligence, investment turns into gambling. And gamblers, on average, lose more money than they gain.
Therefore, the democratization of financial investments triggers an increasing need for an objective and independent assessment of the quality of the issuing firm, similar to what major rating agencies such as Standard & Poor’s or Moody’s do for corporate bonds or Morningstar does for mutual funds. Without such guidance, investors risk falling prey to “entrepreneurs” who want to make a quick buck by exciting the public with half-cooked business ideas that fail before being launched.
Alethena, the Swiss ICO Rating Agency
This is the key issue that Alethena attempts to tackle. Grounded in the Swiss virtues of independence and neutrality, the firm’s young management team has the vision to become the leading rating agency for ICOs and blockchain-based investment alternatives.
Backed by artificial intelligence, their due diligence process continuously monitors a broad range of key success factors of the issuing firm. The information is then aggregated into an overall rating of the firm as well as four sub-ratings that assess the technical feasibility, the validity of the business case, the transparency of the governance structures, as well as the overall legal setup and potential regulatory challenges.
This methodology is not limited to ICOs, but it extends to crypto assets more generally and therefore also taps into the vast potential that the blockchain-based securitization of investments such as real estate, airplanes, or gem stones offers.
No Democratization of Financial Investments without Independent Ratings
Initiatives such as Alethena clearly have a great potential to bring light to the currently obscure world of coin offerings and blockchain assets. By dismantling information asymmetries and providing consistent and objective information, they make it easier for investors to navigate the fascinating space of crypto assets. And by making it harder for unserious companies to exploit uninformed investors, they contribute to the overall reputation of the crypto market.
In fact, it seems unconceivable that the democratization of financial investments can be successful without such independent rating agencies. Therefore, I am excited to serve as a Strategic Advisor to Alethena and I wish the company the best of success with its ongoing coin offering.
About the author: Urs Walchli is a Visiting Assistant Professor of Finance at the Simon Business School at the University of Rochester and the Associate Academic Director of Rochester-Bern Executive Programs. He is the founder of the open access finance knowledge center TEJU (“teach you”) finance and he serves as a strategic advisor to new ventures in the crypto space, including Alethena and Thrive.
Alethena is the first Swiss Blockchain-Asset Rating Agency that is 100% independent, transparent, and neutral. Visit www.alethena.com for more information.