Since March, more than 3.2 Billion USD flooded the so-called Initial Coin Offering market, creating a vibrant new industry, seemingly out of thin air. Beginning as a marginal curiosity of the ecosystem surrounding Bitcoin, hundreds of new startups are now joining the party daily, trying their luck at becoming part of the statistics.
An Initial Coin Offering, as the name suggests, is an event in which a company offers its own cryptographic coin, or token. These tokens then function somewhat like a voucher for a future service, provided by the issuing company. This would be akin to Microsoft selling Windows-coin before having written one line of Windows-code, using the raised money to actually develop Windows, and then release the Operating System for free, while requiring a Windows-coin deposit for each use – basically rendering the application into a digital vending machine.
It’s not hard to see why this funding model attracts entrepreneurs like an overturned tuna delivery attracts cats. While traditional fundraising methods require companies to hand out shares (and with them control, as well as future profits), or at least take on loans, token sales yield pennies from heaven – with almost no strings or regulatory oversight attached. Except for the freshly minted cryptographic token itself, the offering company isn’t legally obliged to deliver anything in specific to token holders, who are apparently very much content with the opportunity to speculate on the demand for applications which are yet to exist.
This became painfully evident two years ago, long before ICO was a household term. Ribbit.me, a startup promising to “transform the loyalty program industry” on the basis of a cryptographic loyalty scheme, sharply pivoted on the utility of its token. After raising millions from the public, Ribbit.me rebranded as loyyal and went on developing its businesses in Dubai. Loyyal’s new business model did not include the issued RBR token, rendering it useless and casting its market value towards oblivion.
Stories like the Ribbit/loyyal tale are not predominant, but they are far from being rare or especially surprising in this industry. In the light of this, one might ask what on Earth happened in March 2017 that would help to explain this sudden influx of investor money into such a volatile market. One of the reasons, at least, is the phenomenal behaviour of Ethereum – the mother and father of all ICOs. In Spring 2017, ETH – the token associated with Ethereum – quintupled its market value from approx. $10 to $50 in a matter of hours, beginning a bull run towards $400 in mid-June. This, to say the least, had an inspiring effect on entrepreneurs and investors alike.
Since then, the news about Ethereum’s corporate partnerships, setting its price on fire in March/April, has almost been forgotten, but the psychological effect left its mark. In the months to follow, some ICOs, such as Tezos and FileCoin, raised in a matter of days close to a quarter billion USD each, attracting more entrepreneurs to the space and generating a Fear-Of-Missing-Out atmosphere among investors.
With this sudden, explosive growth of the ICO market, previously apathetic regulators started to pay attention as well. The United States Securities and Exchange Commission (SEC) has already begun to investigate ICOs, reining back on almost all token offerings launched from US soil while preventing US citizens from participating in those located abroad. The Chinese government, notorious for its erratic love-hate relationship with cryptocurrencies, convulsed the ICO market twice this year, temporarily freezing token exchanges and leaking rumors of banning all cryptocurrencies – A party line that has been relaxed since September, yet without conclusive guidelines in regards to what’s next.
With this new regulatory interest and the first waves of disgruntled token holders protesting their losses, the ICO market has seemed to cool down a notch. However, not much more than a notch. New ICOs are being launched daily, with entrepreneurs understanding that change is imminent, though not necessarily catastrophic in nature. Some even welcome the new regulatory landscape as a healthy imperative, heralding a more mature phase of ICO fundraisings – among other things preventing the recurrence of a Ribbit/loyyal style debacle.
Despite the regulatory hammer being suspended in midair, many startups are already preparing for a more compliant environment – often surpassing what’s explicitly required by existing regulations. Agrello, an Estonian LegalTech startup, as well as Salt-lending, a blockchain-based credit provider, were amongst the first projects to require full Know-Your-Customer and Anti-Money-Laundering processes during their campaigns this Summer. Requiring token buyers to submit copies of their passports and prove their residency is not a step that’s being taken lightly in the anonymity-obsessed cryptoculture. As a surprise to many, this voluntary regulatory measure hardly affected both projects, which despite the hustle, raised tens of millions of dollars. Moreover, since Agrello and Salt-lending, voluntary full KYC has become almost a standard procedure for ICOs that want to be taken seriously.
Other projects double down on this behaviour, and regard the new regulatory suspicion as an excellent business opportunity. Polymath, describing itself as the “Interface between financial securities and the blockchain”, counts on even harsher oversight and offers entrepreneurs a venue on which tokens can be issued as actual securities, traded under the official blessings of the SEC. This proposal is accepted with mixed feelings in the blockchain community, regarded by many as a step in the right direction, while others – primarily so-called old-school cryptopunks – scorn at the attempt to please the adversaries of the State.
In the meantime, an entirely new sector of ICOs is taking shape, offering regulatory compliance services and dealing with the aftermath, left behind by droves of failed coin offerings. LEXIT allows owners of failed startups to liquidate their assets, sell IP and technology, and minimize losses – a service almost comically tailor-made for the ICO ecosystem. SelfKey bases its business model on future requirements for stricter identification and Know-Your-Customer guidelines, hoping to develop a global digital identity service on these grounds.
Carefully, albeit persistently, most regulatory watchdogs are willing to give this new cooperative spirit of a once renegade industry a chance. Especially the EU, not known for being lax on consumer and investor protection measurements, seems to demonstrate patience. A fact that led some of the Union’s members to become safe havens for ICOs. So much so, that CNBC was led to speculate that E-governance friendly Estonia might launch its own ICO. The headline was later exposed as “Fake News”, but the very fact that it was so widely believed for an entire week speaks volumes.
Despite obvious investor fatigue and regulatory insecurity, the willingness of entrepreneurs and blockchain-related investment funds to cooperate with the authorities and shapeshift the ICO market into a more compliant sector, seems to delay or even preclude the foretold collapse of this new industry. Addedly, as long as Bitcoin, the unofficial reserve currency of the ICO market, keeps on generating weekly all-time highs, it seems highly unlikely that investors and entrepreneurs will allow ICOs to vanish completely anytime soon.