The need for decentralised capital
When we contemplate the concept of decentralised capital, it is challenging to explore the idea without comparing and contrasting it with various methods of centralisation. Access to capital is something that has tested banks, funding systems, and economies for many centuries. How do you distribute capital? Should you use banks, government agencies, ventures funds? Do these systems deliver capital based on basic methods of risk calculation or do they look at other aspects — philanthropic mandates, job creation or pure return on investment.
The easiest way to think about a form of centralised capital distribution can be found in the policy-driven environment of banking. Technological advancements mean that risked based scoring decisions are today backed by data science and processes are now evolving, but is this the answer? Moving from a centralised decision-making system to the birth of crowdfunding and the growth of the peer to peer economy has brought about massive disruption. First, let us deconstruct and examine the birth of the crowdfunding phenomenon and what is known as the Initial Coin Offering (ICO).
The birth of crowdfunding
Crowdfunding has its roots in the arts industry with Scottish rock band Marilion who’s fans raised funds in 1997 to support them tour their upcoming album in the US. This system of funding spread and evolved as ongoing technological advances gave rise to an ever more digitally interconnected society.
However, it was not until 2009, with the success of the funding platform Kickstarter, that this model took on a more disruptive force in the broader distribution of capital. Kickstarter has gone on to enable 14 million people to fund nearly 140k projects globally totalling 3.4bn. Although proudly proclaiming itself as a “Benefit Corporation” it is far from a decentralised form of access to capital, as there is a myriad of rules and fees on the funds raised.
The rise of crowdfunding shows no signs of slowing down with a plethora of niche platforms peer to peer lending, equity crowdfunding and sectoral specific players. In fact, the World Bank estimated global investment would reach 93bn by 2025 through crowdfunded projects.
The rise of the ICO
With the advent of Blockchain and the unstoppable rise of digital currencies, there has been an explosion of funding in 2017 primarily using cryptocurrency as the funding tool and labelled Initial Coin Offerings. This method of financing brings the decentralised funding ecosystem to a new level and has seen an explosion over the last 18 months. Regulators do not know how to control it and institutions are correctly sceptical.
ICO IS an unregulated means by which funds get raised for a new cryptocurrency venture. An Initial Coin Offering (ICO) is used by startups to bypass the rigorous and regulated capital-raising process required by venture capitalists or banks. In an ICO campaign, a percentage of the cryptocurrency gets sold to early backers of the project in exchange for legal tender or other cryptocurrencies, but usually for Bitcoin.
While there are unprecedented amounts of funds going into new technology startups using the ICO funding method, there is a chasm growing between regulated centralised authorities, the crypto community and the companies availing of these funds. A recent report by Atomico indicates that nearly half of all ICO funding is domiciled in Europe and of that almost 25% of these funded companies have a decentralised structure.
Decentralised capital and a social ecosystem
It is clear there is an appetite amongst investors/funders/founders to have more distribution of decentralised capital. Social Media has recently brought unparalleled access to an abundance of both information and resources. This access has led to many new facets of communication and interaction. It can be argued if this level of access is having a positive impact on society, but either way, it is an evolution that has undeniable momentum. Whatever the answer may be, the growth of this method of digital funding is only accelerating.
The continued democratization of the access to decentralised capital is something that society can only welcome. It brings a viable alternative at a time when all sectors are facing unprecedented waves of disruption. Whether the funding decision resides with a select few, such as venture funds, policy-driven financial institutions or crowdfunded platforms, the advances in technology are enabling new forms of fundraising to what has been historically a very flawed system
Disruption and innovative thinking are always challenging the status quo
The core principles that sit at the heart of Blockchain, cryptocurrencies and ICOs are a fundamental challenge to Banking, lawmakers, and institutions. There are similarities in the philosophies of decentralised crowdfunding models that the ICO funding debate are bringing to centre stage. While there are understandable concerns with regulation, fraud, and security. But the sheer disruption that ICO and the rise of digital currencies are presenting has brought about a real possibility for change.
We are witnessing an ever-growing chasm between centralised regulators and the market which is favouring decentralised funding though ICO vehicles. Retrospective legislation is going to take years if not decades to catch up. It poses a challenge and epitomises the dizzying distance at which technological advancements are ahead of the centralised bureaucracies that draw up the rule books.
In conclusion, we are living in an age of real change and political uncertainty. The possibilities that Blockchain, digital currencies, decentralised capital and ICO funding models present can bring about an unprecedented wave of positive and welcome disruption. Embracing digital currency along with the next wave of innovation will allow decentralised power to be a genuine possibility.
In essence, decentralised capital and having an open, honest, rational approach to decentralised technologies like Blockchain, the token economy and ICO funding models can only but bring a welcome alternative to a currently flawed, stale and centralised system.
