ICO: A digital Wild West with grand horizons
2017 was the year where cryptocurrencies disrupted the agenda and broke ground for ICOs. The new, alternative financial system is risky but also reveals possibilities for future blockchain markets.
For good reasons, it is often described as “the wild west of the digital world”. Initial Coin Offering, in short ICO, is a relatively new fundraising mechanism based on cryptocurrency and is today mostly applied by entrepreneurs trying to raise money for blockchain ideas. The wild aspect is not to be found in the use of new technology but in the regulation of it – or rather, to be accurate, the lack of it.
Legally speaking, ICOs are on shaky grounds. Usually, investment in securities such as shares and bonds is heavily regulated. This, however, is not the case with ICOs.
“Traditionally, investments are overseen by the Financial Supervisory Agency or alike, securing primarily two things: Transparency and investor protection. Even if ICOs were to be classified as straight forward investment objects, they are unregulated. As an investor, one has no protection and the risk of using it for money laundering and as means of financing illegal activities such as terror is much higher” IT lawyer and partner in Bird & Bird, Martin von Haller Grønbæk explains.
[What is an ICO? ICO is short for Initial Coin Offering. It is a hybrid between crowdfunding and traditional issuing of securities, a so called IPO, though an ICO is not to be compared to a stock exchange listing. Today, ICOs are often used by entrepreneurs to raise money for blockchain ideas. ICOs are considered riskier than IPOs and the market is still relatively unregulated.]
Regulating ICO’s is tricky
In 2017, ICOs grew more popular as cryptocurrency, especially Bitcoin, gained reputation and the use of the simpler Ethereum blockchain became more widespread. Blockchain is the foundation for cryptocurrencies, which today can be found in a variety of types. According to Coinmarketcap, as of the 8th of January 2018, there is a total of 1.394 varieties of cryptocurrencies, collectively reaching a market value of $751.146.908.716.
[How the market value of cryptocurrencies is calculated: The market value is based on the gross number of digital coins in stock multiplied by the given value of each coin. Source: Coinmarketswap.com]
Looking to other countries, responses to the new digital currency are being formulated. The US, Gibraltar and Singapore all warn against it but have nevertheless started offering individual counseling on how to regulate it. In China, on the other hand, an overall prohibition has been put in order.
“Today, cryptocurrencies aren’t bought for use in the market or as part of a validation network, but because it is assumed it will increase in value. That’s the trend at the moment. But it shouldn’t be so. There are much more exciting applications possible than short sighted speculation,” says Martin von Haller Grønbæk.
ICOs can raise money where market forces fall short
”The exchange of values is registered by a central body trusted by all of us. Legally, this is costly. But imagine we didn’t need this unit because we all use blockchain. In addition, the market will have its own currency, meaning payments won’t be done in money but in the specific currency of the given market. One wouldn’t invest just to sell again, but because one wish to be part of the system long term, support the idea or help providing the infrastructure,“ says Martin von Haller Grønbæk.
As an example, he points to the HTTP-standard which everyone is available for everyone to apply. The standard isn’t to be owned or sold and crowfunding as a financial model would fall short as well. However, as a hybrid, the ICO could be interesting to apply, Martin von Haller Grønbæk suggests. The ICO is less complicated than securities and the protocol could inhibit a buyer’s instant sell off.
“It is an interesting way of funding areas normally overlooked by the market forces,” he says.
[What is Blockchain? Blockchain is the building block in cryptocurrencies. By means of math and cryptography, blockchain enables an open, decentralized platform for transactions leaving no need for mediators. Besides being used as cryptocurrency, blockchain can be applied in smart contracting, online identification, journals and transactions. The potential is said to be boundless and blockchain is considered the most revolutionary technology since the invention of the internet.]
An ever changing market
As of today, cryptocurrency has been on the market for 8 years. In 2012, Bitcoin, the most widely known cryptocurrency, was yet to be mainstream. Nevertheless, this was the year where Sigurd William Rachlew Høystad, serial entrepreneur and VP at Spires United, decided to enter the market.
”I became obsessed. I wanted to put all my savings in Bitcoin but withheld myself. Back then, I was 19-20 years of age and I consulted my father. He talked me out of it. I regret that know,” he laughs.
But wouldn’t it also have been too bold a move to risk everything on Bitcoin?
“Sure. But the market was different back then. It was smaller. I did end up investing a little. That as well was risky because everything was so new and vulnerable for governmental intervention. Today the market has changed. It’s more professional, valuations are higher, and more is at stake. The prices have become overheated and though I’ll be carefull to call it a bubble, they are inflated,“ says Sigurd William Rachlew Høystad.
He himself mainly got involved in the market as he eyed an opportunity for major returns. As he says, this is an investment and not a donation. However, the possible potential of the ICO’s also played a part.
“It is important to make capital available for companies at this stage of a development. In time, blockchain will become as influential as the internet,” he says.
Point of no return
Just like the spread of the internet, it takes time for a market to mature, says Sigurd William Rachlew Høystad. Certainly, we can’t go back to a time before blockchain. Not now.
“Cryptocurrencies and block chain meet a need we had an urgency to address. With the growing number of hacks where millions of identities have been stolen, there is a need for a secure, decentralized ID-database. Likewise, a number of developing countries can benefit from cryptocurrencies when the inflation of their local currencies has skyrocketed. The cryptocurrencies don’t exclude anyone and let everyone participate in the economy,” he says.
As an investor one has to be cautious. The popularity of the cryptocurrencies has attracted many just looking for fast ways to become rich through an ICO.
”We have seen examples of companies raising billions in ICO-seed rounds without having an actual product. Research is vital and a readiness to lose everything the minute one enters with an investment. The demands for liquidity and returns have been lowered and the amount of money being raised has gone up. One have to be willing to spend a significant amount of time finding the right cases,” says Sigurd William Rachlew Høystad.
The bubble must burst for the successes to grow
Though he believes the ICO’s is a smart way of funding crypto-projects and it eventually will become a way to fund startups, Sigurd William Rachlew Høystad doubts ICOs will become the new norm for investments in general. Neither does Martin von Haller Grønbæk, but he believes we will see a growing number of ICOs before facing a crackdown. Just like it was the case with the IT-bubble.
“As it is now, it’s a haven for frauds. However, a lot of future business will undoubtedly evolve around supplying the new businesses arising from the second wave of the blockchain-technology. Many of the new businesses won’t survive and as we saw in the dot-com-bubble, the success stories will become evident when they have room to grow,” he says.