ICOs and Smoky Rooms
I’m not a smoker and don't really like the smell of cigarettes. But smoky rooms remind me of earlier in my career when I was stationed in Moscow, Russia, for five years. I fell in with a group of expats that held weekly poker games. We played in a few places around Moscow, mostly in the back room of the Chicago Prime Steak House on Strastnoy Blvd, only 1.5 miles from Red Square.
It’s been almost two years since I played my last game with the Moscow Poker Club and I can't remember how much I won or lost, but I can recall many of the evenings in that smoke-filled room smoking cigars and playing playing cards. We would spend the whole night laughing while swapping stories about life in Russia and our collective experiences in that blessed country.
Smoky rooms — Ok for poker, not so great for start-ups
Now I live in Tokyo, Japan, and I manage the secondary listings and Initial Coin Offering or ICO business at QUOINE.
For those not familiar, the ICO has rapidly gained traction as the preferred method for raising capital in the blockchain world, displacing traditional venture capital funding and even IPOs. By April of 2018, 6.3bn USD had been raised via ICOs, exceeding all of 2017 amount of capital raised in just the first four months of the year. In short, the ICO method of financing has caught hold and is here to stay.
In my role at QUOINE, I have seen the growth of the ICO industry up close. I have met many creative and passionate entrepreneurs who are trying to build new business process and ecosystems based on blockchain technology. Interacting with these founders, I have learned that up to this date the financial equivalent of the “smoky room” is unfortunately a large part of how these blockchain startups are funded.
What do I mean by smoky rooms in the blockchain capital raise process? Let’s start with the syndicates. These are people who go out and raise funds for ICO projects by collecting crypto — usually ETH or BTC — from contributors around the world. They use Telegram and secret WeChat rooms to communicate. They ask people to send funds to their own wallet. They know little more than the contributor’s Telegram ID i.e. “CryptoSteve 154” but no proper KYC is performed. Besides totally disregarding compliance, these syndicates will extract a heavy toll on the project team for their “contribution” to the project.
I met one such “syndicator” in my office in Tokyo recently. He had impressive tattoos and an unusual beard. The appearance did not put me off. We are in a new modality of fundraising. An emerging industry that is unconventional by design. But when he informed me that the syndicate was seeking a fee in the range of 25-30% of the funds raised from the Token Issuer for performing their role, I was taken aback. Later that evening when discussing the day's events with my wife she asked a reasonable question, “Are you sure this person is not a yakuza?”
Recently the latest fundraising method — which can only be described as a gimmick — has sadly descended on the industry. In the token “swap” an ICO project team swaps their illiquid, impossible to value token for another illiquid token with no market-based value. The Project team then turns around and claims to the world that their fundraising goals have reached the full capital raise target. 100% success. Release the confetti and balloons.
Sounds good right? The problem with this capital raising theater is that it has nothing to do with building a business and will do very little to help fund the project’s expenses like salaries and cloud services. The funds raised are illiquid and have questionable value; good luck paying the rent with these tokens, internal valuation metrics stating they are worth X notwithstanding.
A worthy project does not need to descend into the world of token swaps. Any project that does this is raising a red flag regarding its viability and transparency with investors. QUOINE never has nor we will we ever participate in such shenanigans— we will keep our focus on helping to connect investors and blockchain start-ups by providing transparent platforms and great technology. We create a forum for entrepreneurs to “tell their story” of how their project is leveraging the blockchain to create value for token holders.
What does the lack of transparency in the capital raise mean?
It means scams can happen. A couple of months ago while I was in the QUOINE Saigon office working with our Engineering team on our ICO platform news of the 660mm USD iFan ICO scam came to light:
So what do these ICO scams have to do with me?
The blockchain is an important technology that will in time improve all of our lives. The technology needs people and resources to reach its potential. Today for example, the Ethereum blockchain can only write ~15 transactions per second. Mastercard and Visa by comparison can handle 1,000s of transactions/second.
While blockchain is an exciting topic with limitless possibilities, it’s important to take a deep breath and understand the difference between potential and actual present-day usefulness. We are off to a promising start with this technology, but the actual use cases of blockchain and cryptocurrency in 2018 are few and far between — we are still in the early days.
In order to develop a blockchain-based application (decentralized application or “Dapp”) entrepreneurs and project teams need the same things that a non-blockchain business requires: human resources, engineering, marketing, business plans, capital. And when an iFan-type scam occurs it's not just those who got scammed that are hurt. These scams push back the pace of investment in and adoption of blockchain technology by the mainstream. It also makes regulators nervous and slows down financial institutions like Blackrock or Fidelity that act as fiduciaries from entering this space with trillions of dollars of potential capital.
The way capital is raised in the blockchain world is simply broken. When entrepreneurs are not able to access capital in a transparent, cost-effective manner, its society that is the loser. QUOINE is committed to cleaning up the mess in the blockchain based financial ecosystem. This is why we are so passionate about our ICO platform and approach.
There are many in the ICO advisory world who won't like that we are trying to bring these practices to light and end them. We are threatening their very livelihood. But these are outmoded forms of connecting capital providers (investors) and capital consumers (entrepreneurs). These smoky rooms are really an inspiration for the development of QUOINE’s ICO platform: an end-to-end solution for token issuers and token buyers to transparently participate in the blockchain-based capital raise process.
Part II of this series, I will share how QUOINE is taking these governance and transparency issues head-on and re-inventing how ICOs are executed.
For more information on QUOINE’s ICO platform, please check out this podcast: ICO Mission Control Framework.
