Development On the ICO market [Part. 2]

Development within the ICO market is clashing with reality; nevertheless, PayPlus+ has generated functioning 500 million PLUS utility tokens ERC20 compliant on Ethereum as a result of an existing product and profitable multichannel B2B business, PCI DSS 3.2 certified transaction gateway on a cloud network.

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In the first part of this article, we reviewed an unclear panorama and we saw why regulation is necessary to stop the current uncontrolled chaos of the ICO industry (where tokens are issued and traded without any proof of concept).

No matter if called ICO or STO, security tokens are subjected to rules and regulations that must be applied when issued, marketed and listed. This contrasts with all previous loudly mentioned, elementary and revolutionary characteristics prized on Blockchain: tokens as the unregulated, decentralized and disruptive alternative to all regulated financial products.

In this article, we analyze the current situation of the ICO industry and showcase reasons why that market is spoiled and populated with people who fail to work within the principles of Blockchain technology. When people seldom act well, authorities bring regulations, and when regulations do their job… weak stories act as a house of cards built on shaky foundations.

Sitting on a Time-Bomb

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The European Commission has finalized regulations for the crypto-market and passed the first resolution regarding a regulatory framework to be ratified by all EU members.

In this way, they will enable financial authorities to govern all existing and new ICOs/STOs, their working-process along with allocation and trading at the same level as of other governed financial products. Thus, from a regulatory point of view, security tokens are just another financial instrument as all other regulated stocks or bonds, and further do not reflect the ideological premises of being “disruptive” and a “revolutionary alternative” to stocks and bonds, as of the case of utility tokens.

Token-holders are missing something. Similar to all regulated stocks, bonds or any other financial products, a regulatory clarity of a security token in a country „A“ does not automatically mean the recognition of this regulation in a country „B“ or „C“ and vice-versa. The regulatory clarity in an independent jurisdiction has no impact nor an automatic „passport“ for the EU, where a further approval of the local financial authority is required in order to be considered and distributed, protecting token buyers living in that country.

A German financial authority BaFin is handling tokens with the regulatory framework of stocks and bonds as soon as they represent a shared-participation to a company or rata distribution of profit, hence security tokens require a regular prospectus. The regulation for security tokens in Germany includes the sale only through BaFin-licensed brokers and the protection of token-buyers upon purchase, like any other regulated financial instrument.

On the other hand, utility tokens represent exclusively the right of using/buying a predefined service or the good of the issuing company; thus, in Germany there are no obligations of submitting a formal request for sales and trading to local financial authorities: this is the disruptive and real alternative model to traditional funding of innovative startups, and further reflects the principle of Blockchain technology. By issuing utility tokens the startup creates a network of real users and capital providers, which grants benefits to all involved counterparts, increasing the value of the company and reducing/limiting risks of speculation.

The major reason for preferring security tokens (due to their profit-sharing and/or participation to the share capital as any other regulated stock) is useless when more than 90% of all ICOs are loss makers and are unable to generate sales or profitability for years. On the other hand, there are profitable companies with an existing but extendable business, with products or services ready to be used, able to pay out significant incentives to token-holders, but do not see security tokens as the easier alternative to issuing stock on a regulated stock exchange and prefer to issue utility tokens.
 
According to an Ernst & Young Report, Currently 86% of tracked ICOs are below listing price, more than 30% have lost all value and for 71% of presented projects, there is no demand in the real market. Token-holders are not able to trade their tokens or to exchange them for traditional currencies because of extreme price volatility and complete illiquidity of those tokens, which could further lead to market price manipulation (recurring rumors regarding issuing companies buying low volumes of their own illiquid tokens with the money of the fundraising, pushing prices sky-high). Currently, token-holders are sitting on an unprecedented volume of unsold tokens and are not be able to redeem their tokens for a long period of time.

The current ICO landscape recalls the internet-bubble at the end of the 90s, in Germany with the Neuer Markt; at that time entire generations of investors switched off fundamental criteria of valuation and bought stocks based on simple business concepts of euphoric “Grandezza”. The Neuer Markt boomed from 500 to 8500 index-points, before collapsing to 400 points when the bubble inevitably exploded and firms went bankrupt. Needless to say that rash “investors” lost all their money. Here we go again, but we still don’t know that we are sitting on a time bomb!

Regulatory Frameworks Stop Confusion, Provide Advantages and Attract Investors

In a current crypto-market which lacks control, a myriad of 500 and more crypto-exchanges will be governed in order to reflect the same standardized parameters as regulated official stock exchanges. Today the listing fees of major crypto-exchange are far higher than fees of listing on a regular stock exchange. It will come as no surprise to see crypto-exchanges disappearing when the regulation comes and only a select few exchanges will survive. Thereafter only a handful of trustworthy digital-marketplaces will remain at the centre of the crypto-universe, likely linked to NASDAQ, Deutsche Börse and other major exchanges. When crypto-exchanges will finally showcase transparency and usable, standardized platforms to the masses, Blockchain shall taste victory:

  • Wide selection and high liquidity / traded volume of tokens, with the exchange of major legal tenders
  • 24h Help-Desk, easy to use and quick, a mobile app for smartphones, no user privacy violations
  • Safe easy-verification process, 2-factor authentication (SMS, encrypted email alert …)
  • Insurance protection for currency and tokens stored on servers, monitoring of wallets
  • Different deposit and payment options, including credit cards
  • Competitive transparent transaction fees, incl. purchase, deposits, and withdrawals
  • Fast execution of a transaction with instantly payments/transfer of tokens into the wallets
  • Advanced tools such as stop-loss, limit-orders etc.

All in all, regulation will stop the current dominating chaos in the crypto-market, resulting in the most-traded whitepaper concepts’ disappearance following unjustified overvaluation and hopeless illiquidity. Finally, tokens can develop into an effective financing tool for quality blockchain projects and real institutional investors who wish to enter the crypto-market investing in ICOs, better with a real business or R&D solutions.

What does Institutional Investor really mean?

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There are two types of “investors” in the Blockchain space: one is the traditional VC spending money on all emerging technologies, and the other type is the Blockchain-dedicated VC investing exclusively in Blockchain projects based on R&D. It is assumed that the more than 4.000 issued tokens and crypto-units globally available on crypto-exchanges are traded exclusively by private people, most motivated by greed.

Institutional investors are authorized and governed by a central financial authority for investing and managing assets and according to strict rules and regulations, among others protecting the funds given to them for investment purposes. Today, crypto-media are wrong and misleading calling them “institutional investors” when a simple firm is investing in crypto: the legal framework for ICOs is still unclear in all major markets where ICOs have been issued (Singapore, the US, UK, China, Russia and more), nor in the EU and other countries where established institutional investors are registered and governed by a financial authority, and thus not permitted to invest in unregulated assets.

Every activity that deals with financial instruments is highly regulated, for example, activities like financial investment advisory and portfolio management. They all require preliminary approval by national regulators, which is further true for advertising and marketing of financial products. With exception of VC, asset managers from selected tax-heaven countries and the very few crypto-funds which have obtained a license in major regulated countries at the end of 2018, the most so-called “institutional investors” are not institutional investors because they are not regulated nor governed by a financial authority.

Despite the fact that those labelled “institutional investors” can invest third-party money in crypto-products, they offer an unlicensed advisory for blockchain, ICO-setup, tokenization, smart-contracts, KYC and more, which does not require registration according to the “investment advisory act” and its rules, nor does it comply with securities regulations. Simple data about those “investment” firms are neither available nor transparent (against Blockchain-principle of transparency) as of the case of real institutional investors.

Media report contradictory numbers related to Asset under Management, as of the case of a big US crypto-investor, officially registered as SEC-unlicensed advisor and not as an institutional investor. A variety of online articles report $500 AuM in December 2017, $724m in March 2018, $800m in July 2018 and $700m in December 2018; however, with a valued venture investment in Blockchain of $65m and losses increased to approx. 75%. How is this possible if in Dec. 2017, BTC was trading at $15.000, $9000 in Mach, $7000 in July and $3500 in December 2018? How can it be possible to keep the same assets under management when the value of tokens collapsed during 2018 and then provided 1/10th of their initial value? Which value-method have been used to report the AuM, the (insignificant) total initial investment value or the real value of their tokens related to the last traded price of the respective asset?

This chaos is the result of an unregulated blockchain investment market of too many castles built on immaterial clouds. Now it’s time to rule the ICO industry and focus on castles built on a solid foundation.

Crypto-investors can take advantage in the current bear market and test the best rules of institutional investors for 30 years when regulated stock markets were bearish: Stock Picking

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The crypto-market is more unpredictable than the global economy and the two do not move in sync. Additionally, cryptos have no stock-market-like mechanisms to discount news and financial results, because most are disconnected from business-oriented results (allegedly more than 90% of total ICOs). Successful fund managers of previous decades minimize losses and avoid mistakes following simple yet powerful rules based on financial-date linked to the companies to select for their portfolios. Usually, bad days in bear markets are good days for separating “wheat from the chaff”, in meaning the sale or avoidance of overvalued stocks and further buying stocks that represent robust financials and feasible business models. This is Stock Picking.

In the crypto-market, it is just the same, with the difference that it should be easier to separate the wheat from the chaff, on the back of an abundance of overvalued illiquid tokens with neither a worthy business model, existing product or ones to be launched. The number of tokens representing present products or feasible profitable business plans globally is scarce, whether a security or utility token. The lucky galactic performance of BTC, ETH along with other altcoins in 2017 is a misleading indicator for future trends of the crypto-market and reflects its inconsistency. Buying tokens of whitepaper concepts based on a historical rally without examining the value of feasible and profitable business cases are murderous. Critical investors with long-term value strategies are better positioned focusing their approach on good fundamentals, double-checking business-plans and existing or potential intrinsic business values.

PayPlus+ aims to extend the existing business from Italy to Germany and other international countries, and further increase sales in 2019 by +150%, while for 2022 we aim to turnover 15-fold that of 2018, keeping the current EBITDA margin of 50%. PayPlus is offering an attractive bonus system to early subscribers of the private token sale. The reward plan has a threshold of 100 Million PLUS Tokens at a price of €0,10 each (hard cap €10.000.000) and will be voluntarily granted for early subscribers, regardless of whether tokens are sold or kept once the lock-up has expired. Details are available through registering on the website or reaching out to info@payplus.ag.