Believers in a much more limited role for the state have been on the losing side of history more times than it is possible to count. Cryptocurrencies and the issue of non-currency crypto tokens in material part grew out of an anarcho-libertarian vanguard of technologists and investors.
Initial Coin Offerings (ICOs) – the offering of a new crypto currency or crypto token to investors to raise funds – are showing signs of being civilised. To date they have been largely unregulated, and as a result easy prey for critical comment, but recent voluntary movements toward regulation may just be their saviour. In part, such movement has been a result of the dark side of ICOs: "There has been a lot of fraud and failed projects. Many investors are underwater. Regulation will only get tighter as the space evolves," says Charles Delingpole, Founder of ComplyAdvantage.
According to Crunchbase, last year ICOs delivered at least 3.5 times more capital to blockchain startups than through venture capital (VC) and others have asserted that crypto funds raised outstripped the VC industry as a whole driven by the growth of token issues rather than just crypto currencies. "The rate of growth and maturity of the ICO market is somewhere between impressive and frightening," comments Tim Field, head of Crypto and Blockchain at Mishcon de Reya.
As Joe Charlesworth, Co-Founder of the cryptocurrency investment management platform PredictionVC, says: "If your ICO goes on to obtain a market cap in the hundreds of millions, traded on multiple public exchanges, there's no good reason why the same regulations shouldn't exist to protect investors. Public companies have to publish quarterly management accounts and forecasts that get audited by independent third parties. The same principles and reporting requirements should apply to the companies or foundations running ICOs and other forms of token sales." Charlesworth thinks we will see many of the regulations that apply to public companies, such as financial reporting, audits and price manipulation provisions trickle down into ICOs over the coming years.
Security Token Offerings (STOs) are set to do exactly this, shake up the industry and potentially taking a bite out of traditional Initial Public Offerings (IPOs). Unlike the utility tokens that to date are the subject of most ICOs, STOs involve tokens that are "securities", voluntarily submitted to state regulation for approval of the information given to investors. For investors, "it gives them a stamp of quality, like say a standard listing on the Main Market in London, and may give them the confidence to access investments they may not otherwise consider", says Field. Block exchanges around the world are actively seeking authorisation by their regulators to be able to trade such crypto "securities". Gibraltar and Malta have publically announced their intention, and Singapore and Hong Kong are hot on their heels.
In a recent interview with Economics Professor Tyler Cowen, Vitalik Buterin, Founder of Ethereum, placed his bets on Asia leading ICO innovation: "Places in Asia tend to be fairly ahead of the curve, in terms of sandboxes in Singapore. I know Hong Kong and Taiwan are looking into sandboxes as well, whereas it doesn't seem like the US has quite that kind of approach, at least at this point in time. It's possible the political environment is just kind of not organised enough to maintain it, and there's bigger priorities to worry about at this point."
Field says that "up until recently there were parallel universes that never met. The ICO community thought the regulators and traditional IPO community were failing to understand the modern world and the traditional community characterised the ICO community as being low grade, too risky, subject to criminality and bound to fail. Recent experience is that inevitable cross-fertilization over time leads to greater mutual understanding hence the move toward regulation." Field is involved with a couple of STOs that are ready to launch as soon as the exchanges are ready.
The appeal for blockchain entrepreneurs is obvious, but entrepreneurs in any industry will come to see STOs as a legitimate funding option. As well as the advantage of not giving away equity or accruing debt, with token issues you can draft bespoke rights for your community, so the whole issue of ownership is a tailored concept. This could mean fewer rights for investors, but this will be reflected in the price.
Though it's not always played out this way with many token-based ICOs – whose investors are often accused of aiming to flip their tokens for a quick profit rather than a belief in the product – there are still compelling reasons to believe in the broad concept of ICOs. As Charlesworth explains: "If you're producing a decentralised application to disrupt Facebook or Netflix, the speed at which you can grow the number of stakeholders in that network is significant. The number of investors in a token sale of $30m often spans the tens of thousands – each of whom could turn into valuable ambassadors and users of your product."
The Wild West may just be on the verge of being tamed. ICOs will continue to make headlines for the wrong reasons, but when STOs come into their own, smarter money and good stories will win the day. Rather than a bubble that's about to pop, ICOs are a funding mechanism that look to be subject to a very big bang.
This article first appeared on FT.com.
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