ICO’s: Let’s Cut The BS

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A panel discussion on Initial Coin Offerings (ICO’s) in June 2018, hosted by Rise London, featured some of the leading players in this exciting, new game.

This article presents the unique perspectives from the panel, Omaid Hiwaizi, consultant Blockchain Startup and ICO Marketing Strategy Advisor, Aldin Ademović, CCO at The Pillar Project, and Obediah Ayton, Private Investment Manager at Chainstarter. The objective is to cut all the BS that has been published elsewhere on ICO’s, and bring you news straight from the people who know what they are talking about.

A Quick Crash Course In ICO’s

Traditionally, it is hard for startups to make money. Even if they have a robust product or concept, they can be bad at selling themselves to investors. Furthermore, traditional venture capitalists can be mean. It’s in their interest to demand a lot back from the startup; namely, influence in shaping the product and shares in the company.

ICO’s have their foundations in crowdfunding, whereby organisations in their infancy raise capital by offering the promise of actual products or services to “the crowd” (ie. the world) in the future; but unlike, Venture Capital, not a share in the business.

ICO’s difference to crowdfunding comes from the return offering. Rather than actual products or services, the early-stage company sells newly created “crypto-tokens” in exchange for more established cryptocurrencies such as Ether (ETC) and, but to a lesser extent, Bitcoin (BTC).

In many people’s minds, ICO’s hold the potential to revolutionize the way people do business, especially for enterprising block-chain startups. However, the “bet” that buyers of ICO tokens or traditional equity make on a startup product or platform isn’t all that different. Both need the startup to gain traction and at least show promise of delivering growth, to see their investments rise in value.

What Was So Wild About ICO’s In 2017?

The whole essence of blockchain, and in turn, ICO’s, is democracy.

By not giving up influence in the business direction or its shares, ICO’s democratise who can raise money for their startup or idea.

The problem in 2017 was that this democratic process was unregulated and the revolutionary concept of ICO’s — that anyone can come and raise money for their idea — gave birth to mercenaries essentially releasing tokens without any tangible idea, concept or business plan. They were effectively printing their own dollar bills.

For fear of missing out on the spiraling boom, people invested their established crypto-currencies in phoney startups. Much like the Wild West, some people made a lot of money, whilst, others lost a lot.

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The “Wild West”. Photo by Chris Murray on Unsplash

What Changed In 2018?

Regulation has come in.

Whilst the regulations differ across the world, to launch an ICO in the UK and EU requires a prospectus: essentially a “deck”. So, now you can only raise up to €5 million through an ICO, before a business plan that takes approximately six months and €200,000 to produce is needed.

ICO’s, therefore, have changed. Now a startup needs to package their ICO more traditionally, using strong professional advisors to produce high quality documentation. A big chunk of capital is also essential.

What Are The Positives And Negatives Of Regulation?

Clearly, the negative is that the very essence of ICO — the democratization of who can raise money — has been lost (to an extent), because only startups with an initial access to funding can afford the lawyers and documentation required to produce the deck.

That said, regulation is a compliment to the growth potential of ICO’s, and it is only a positive step to burst the bubble of 2017. The message now is to embrace regulation.

Therefore, startups should not rush their ICO, but instead wrap their sale in governance. Soon the system will be cleaned of last year’s bad ICO’s, and the bad press will be drowned out too. In 2018 there has been far fewer ICO’s to 2017, but much more money has been raised this year: approximately $10 billion already to last year’s $6 billion.

The Future Of ICO’s

The language of tokens will probably disappear. “Token” was only initially used because it has been tried and tested, but now, with the new, very centralised, regulation, reverting to a more traditional equity-language, will encourage the likes of JP Morgan and Barclays to enter the fray.

ICO’s don’t have a future in China and South Korea: they have been banned. But there are a number of offshore jurisdictions popping up — Bermuda, Cayman, Isle of Man, Gibraltar, Cyprus — that are offering cheaper, leaner frameworks.

At present, it is unclear how these unregulated ICO economies will affect the global market, but an ironic twist feels imminent…

Won’t dodging established economies (EU, Japan and USA) for cheaper pickings offshore, smack of the same age-old problems of traditional equity deals and dollars?