Debates and discussion continue about whether Initial Coin Offering (ICO) bubble has burst.
What is the role of Crypto assets and can the used for more than just raising capital for tech start-ups?
It is easy to understand when you look at the size of the Crypto asset market which has fallenfrom over $800 Billion in January 2018 to $220 Billion. In a recent study by E&Y in to the progress of ICOs from 2017it found over 30% have lost almost all their value, while the vast majority of them are currently trading below their listing price. Only 25% of the companies that E&Y followed have a working product and just 10 of the cryptos accounted for 90% of the gains. So, the lesson seems to be that this is a high-risk investment and surely therefore one ought to diversify one’s exposure by holding a number of different Crypto assets, and having them actively managed? The problem is that the infrastructure is just not in place to allow pension and mutual fund managers to invest in Crypto assets. This has meant it is mainly the hedge and alternative fund managers who are trading Crypto assets, not retail asset managers, making it impossible for small investors to enjoy the benefits of a diversified actively managed fund.
There have been many failures, scams and frauds and unfortunately when you look at the countries that have had more than their fair shareof failures, developing countries such as Africa have not had a great track record. This is hardly surprising as in 2017 it seemed that all one needed to do was to have an “idea” and write a very basic “whitepaper”. The information that ICOs published typically lacked any verification or business plan, and yet Bitcoin and Ether was just sent to you. The funding was often from thousands of people contributing relatively small sums of capital. It seemed that these people were being driven by “fear and greed,” looking for the next Bitcoin which was going to go from ¢1 to $20,000 and all their financial problems would be over.
A good example was Naga which were the first publicly quoted company in the world to carry out an ICO. They is are a German based video gaming company and it ran it’s ICO from Belize and managed to raise over Euros 40Million from 55,000 investors.
This easy money machine was operating in what people took to be in an unregulated environment, with ICOs being advertised on Twitter, Facebook and other social media sites, with scant regard for incumbent financial services marketing and promotion regulations. Most of the ICOs classified themselves as utility tokens to avoid being treated as a security offering, and in some cases made fraudulent statements which subsequently meant some of the founders going to jail!
The fact that some of the ICOs were scams meant that in a number of cases considerable capital was lost and this encouraged certain jurisdictions like China to start banning or clamping down on the promotion of ICOs in their countries.
One has to be careful when deciding if an ICO has been a success or not. If you looked at the value of Omni coin, it would appear to have lost over 98% of its value from its peak. However, Omni coin, which was originally Mastercoin, was the world’s FIRST ICO, set up as a crowdfunding venture to raise capital to develop what we now call “Smart Contracts”. It was designed on an open architecture basis and has been very successful in pioneering Smart Contracts. While it has not created any value for itself, the potential value it may create for others could be significant. In a similar way Tim Berners Lee, who is credited by some for developing the world wide web, does not own it and has not made billions personally, despite the web being used by millions of us every day. So, when judging ICOs, one needs to take a wider perspective and see what is the potential, not just what has happened to date. Many of the initial ICOs are trying to break the existing way business is carried out, and therefore one would expect failure rates to be high as they challenge the way we do business.
But it is not all doom and gloom, for example Ripple claim the World Bank calculates there are $1.6 trillionof costs incurred as money is moved from one bank to another globally. This is a market where $150 trillion of monies are transferred between banks, and Ripple claim it can do this job faster and cheaper than the current system that is used – SWIFT. Whilst only Santander bank are equity owners in Ripple, over 100 international banks are now doing trials using Ripple, and this may explain why it rose in value by over 35,000% in just 2017.
ICOs, and the Crypto assets that they create, can be used to help raise capital for tech start-ups. However, this is really only part of how they can, and indeed, be used. Undoubtedly many of the Crypto assets that are here today are unlikely to survive, but then this ought to be no surprise. Over 50% of new start-up companies in UK and USA fail with in the first five years! If you look at tech – orientated companies according to Harvard Business 75%of them which are funded by Venture Capital never return the capital to the original investors. These numbers are not too different from crowdfunding platform from Kickstarter who claim 66%of crowd funding campaigns fail. Vitalik Buterin who co founded Ethereumbelieves that over 90% of ICOs that have been launched to date will fail. However, is this no different from the Dotcom market when we saw thousands of start-ups only to be left with, just a handful of corporations like Google, Facebook and Amazon which are global cash generating giants!
How are ICOs evolving?
It has been rather ironic that, as the price of most Crypto assets have fallen, we have seen more and more traditional organisations getting involved in Crypto assets. These organisations are building the infrastructure that we need for Crypto assets to be embraced by the asset managers globally. In the last few weeks we have seen Fidelity and Goldman’s announcing they will be offering custody services. Meanwhile, a variety of regulated exchanges in London, Switzerland, Gibraltar, Malta, Dubai, New York and Boston all say they are preparing to launch Crypto security exchanges. These new exchanges could well become “gate keepers” as they ensure that one has to pass relevant KYC and AML checks before one can start trading, to keep the money launderers and other motley characters away.
We need this new infrastructure of custody and exchanges to be in place in order for new types of Crypto assets, such as security tokens, which will enable organisations to offer fractionalization of bonds, equities, property, art – almost any asset. This will potentially enable illiquid assets i.e. property or works of art, to become more tradeable and accessible to smaller investors as they can buy a small % of these assets. Given security exchanges can operate 24/7 on a global basis, security tokens will be able to access not just smaller investors but potentially global investors too.
Another innovation we are seeing with Crypto assets is the rise of Stablecoins, which can be backed by fiat currencies ,$,Yen £ etc, or they could be linked to a basket of the G7 inflation rates, or the price of a commodity i.e. gold or silver. These Stablecoins will perform in a much less volatile manner than existing Crypto assets, and can also be used to process payments as IBM are doing,using the $ Stellar coin to move money without the need to use traditional banks. It is easier for regulators non Crypto investors to understand Stable coins as they are backed by real assets. However, more importantly, Stablecoins could be used in conjunction with Smart Contracts which many herald as a way to reduce administration and friction costs, by allowing automatic payments to be made as goods and services pass between people.A combination of Stablecoins and Smart Contracts could enable Crypto assets to potentially make inroads into the $1.3 quadrillion derivatives market, which is the preserve of sophisticated largely institutional investors, while helping regulators to monitor these often complex instruments.
ICOs are beginning to be used to change behaviour, the Mobicoin from Mercedescurrently being trialed, is designed to encourage drivers to drive in a more environmentally friendly way. Mercedes reward drivers who achieve better fuel consumption with tokens. and then these coins/tokens can be used to have access to Mercedes events, or potentially discounts on new cars, or maybe your next service. It is easy to see companies using tokens as a way to encourage people to use less carbon, especially as governments tax companies based on the carbon that they use. If the carbon savings from their customers can be off-set against the companies’ carbon tax, businesses could result in paying less tax and thus sharing this carbon tax saving with their customers in the form of tokens.
Another way ICOs are being used is by giving them away via Airdrops. This can help start a kickstart a network effect of people using Crypto assets to attract and keep people’s attention, so they spend more time on their website, or return to buy more goods and services. Line, which is a Japanese social messaging service (similar to WhatsApp), recently gave away free tokens to its 200 million users, as way to encourage them to spend more time using it’s messaging service. The more time Line clients spend, the greater the number of tokens these customers will receive, which can be used within Line orcan be exchanged on the Bitbox exchange.
There is considerable evidence that a small increase in customer retention can lead to a substantial increase in a company’s profitability, which may explain why globally loyalty programs are expected to grow by over 20% p.a.Digital loyalty schemes that can be accessible, transferable and exchangeable must be more attractive than the current system where, coffee shops stamp bits of paper when you buy a drink! Crypto assets can be used to create digital loyalty schemes replacing existing reward programs e.g. supermarket, and various airline reward program which have little if any transferability and therefore are often not used.
It took the web 20 to 25 years to develop! Blockchain and ICOs are going to need time for the infrastructure to evolve, allowing governments and regulators to lay down the guidance and regulations that we ideally would like now. But we are still working out the “questions”, let alone the answers we need, so it will take time. A good example of how the Crypto asset sector is evolving is Token Marketwho have raised over $350 Million for ICOs and now are in the process of getting regulated in London, Malta, Gibraltar and Dubai. Being regulated in these different jurisdictions will enable them to help organisations launch security tokens and then trade them on their platform and other exchanges. Token market are clearly embracing regulation and offering Crypto assets that have proven businesses which they hope will start institutional interest.
It is highly likely every interaction that we have with a machine i.e. each train journey, flight, cycle, bus, car ride, press of a button on our phones and computers, what goods and services we consume, will all be rewarded.
Some argue all data is going to be monitised and YOU will be given the option to share that data or not, but you will encouraged, rewarded and incentivised to share that data via tokens. If these tokens can be exchanged into goods and services that have real value for you, no doubt, many will embrace this sharing of data and be paid in Crypto assets.
Currently you credit rating is only based on your monthly mortgage, car loan, credit card and bank payments. Yet it is estimated one makes 200 to 400 purchase a month, so credit rating agencies are monitoring less than 1% of your actual activity and making credit decisions without the complete picture of your financial position. Imagine if you were paying for your mobile phone or your utilities on a pay as you go basis because you had a poor credit rating. If your full financial position was taken in to consideration it may be possible to secure a better credit rating and therefore allow access to a cheaper payment plan. Surely this is a powerful nudge for some to embrace this sharing of data and in turn be rewarded through the payment of tokens? Therefore, we could see an environment where individuals are able to control who has access to their data and they personally get rewarded, unlike todays situation where the likes of Facebook, Amazon and Google monitise your data instead.
The challenge is that we all want the answers today- the financial services regulations and the ability to trust and transact at a reduced price in the increasing digital world that we are in. The reality is that the infrastructure is being built, and the current BIG tech players have hardly got engaged. This may explain why we are seeing some deride the changes which are coming, as it shakes the current status-quo. ICOs have played a small role helping to build the new infrastructure that is needed, and now we are seeing more established incumbents getting involved as they start to understand the magnitude of the opportunity. Meanwhile, Crypto assets are being used in ways that we had not even considered a few years ago, as the pace of change would appear to be getting faster, thus creating new ways for us to transact value using blockchain technology, as opposed to the web which largely to date been about searching for information.
In conclusion we are seeing ICOs, and the Crypto assets they create, evolving to encourage changes in behaviour, act as a payment mechanism, tokenise ownership of illiquid assets and reward attention/engagement.
CEO TeamBlockchain Ltd
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