Devil or Angel

Are ICOs Doing More Harm Than Good?

ICO offerings – whether called token offerings or coin offerings – raised over $4 billion in 2017. That’s up from just $96 million the year before. By February of this year $1 billion has been raised – making it look like 2018 could be a bumper year for new tokens.

Great news, yes?

Well, sort of.

Token offerings are the means by which blockchain-based start-ups raise funds. It’s a crowd-funding approach that circumnavigates traditional fundraising methods – and it offers investors a chance to not only make significant profits but also to be involved in ground-breaking new businesses.

The problem is, not everyone is looking it in quite those terms.

As Joi Ito wrote:

“My concern with today’s ICOs is that they’re being fueled by the gold-rush mentality around cryptocurrencies, and so are deployed in irresponsible ways that are causing harm to individuals and damaging the ecosystem of developers and organizations. We haven’t set up the legal, technical, or normative controls yet, and many people are taking advantage of this.”

And this is the crux of the matter: too many token offerings – or ICOs – are being created for all the wrong reasons. And the lack of any kind of regulatory structure makes it easy for this to happen.

The tokens come in a number of varieties. Key amongst these is the Utility Token. Resembling the kind of token you buy at a fairground – you hand over money and then receive discs of some sort in return that you spend on rides Utility Tokens are the means by which you buy a start-up’s actual products or services. That’s a fair-sounding, legitimate reason for a firm to offer tokens to the market.

But the overwhelming  interest in token offerings has been shown less by enthusiastic would-be users of the finished service and much more by those looking to make a financial killing. And any number of these investors are making their decision based not on the solid, credible underpinnings of the start-up’s product offering but on the Greater Fool Theory – an investing idea that says it doesn’t matter how flaky the underlying asset is – there’s always someone out there willing to pay you a premium for owning a slice of it.

Wanting to emulate the meteoric rise in value of the early bitcoin new token offerings are now an almost daily event. Some of these token offerings are built on the back of solid, credible start-ups looking to build a meaningful, useful product.

The Scam Opportunity

But where there’s a pool of hundreds of thousands of eager investors – some or many of whom are willing to throw money at any token offering in the hope of a big payday – there are naturally going to be lots of unscrupulous operators willing to say all the right things in order to relieve those hopefuls of their cash. If there’s hundreds of millions of dollars flying around the token offering pool you can be sure there’s lots of sharks looking to get their teeth into that money.

And, to be sure, even those with honest intentions have little to fear by promoting ideas that just wouldn’t see the light of day if the token offering environment were regulated. After all, it’s not their money they’re risking.

With a nice-looking website and some clever marketing you’re going to fool plenty of greedy wannabe millionaires into your scam. And that – wittingly and unwittingly – is exactly what’s happening.

Currency Damage

To acquire tokens you must buy them in the currency of the blockchain on which the new product is based. Invariably at the moment the new service uses the Ethereum blockchain – and so investors would buy tokens using Ethereum’s cryptocurrency – Ether (ETH).  Clearly, then, Token Offerings create a demand for the currency on which the token based.  The upward pressure on Ether directly affects its price. Which is fine up to a point. But if token offerings fail in any sorts of numbers – either through fraud or just a badly executed business idea – then demand for its tokens falls and so the price of the underlying cryptocurrency is going to fall with it.

Example is the DAO which having been famously hacked in 2016 caused a 25% drop in the value of its underlying cryptocurrency, Ether. As the present craze in Token Offerings continues unabated – and the instances of successful, credible launches remains in the minority – it could well be that all that demand for ether is going to result in an almighty crash when, finally, token holders start to want to dump their holdings. This, though, remains to be seen.

For now, token offerings are all the rage and despite warnings optimism abounds. A corner might be turned though and a dose of reality could cause people to sit back and reconsider. If they do the resulting drop in activity – plus the general effect of market sentiment – may have a measurable effect on the value of ether. No market likes to see things falling – especially one that’s in its infancy.

Reputational Damage

So this combination of scam token offerings, not-well-thought-out ones and the relative dearth of actual, successful blockchain-based firms is cause for concern for those of us hoping that blockchain is going to succeed across the world.

Bad headlines damage the public’s – and government’s – opinion of and belief in the blockchain. Big price falls – in fact, big swings in either direction – make cryptocurrencies like Bitcoin appear unstable and unusable. All of this leads to a reputational damage to the cryptocurrency/token industry, a distrust of its true value. It’s one thing for detractors and trolls to claim it’s all funny-money being generated or siphoned off by criminals and hackers. But when these claims turn out to even sometimes be true, well, that becomes the prevailing story. If sentiment is generally negative then that is going to slow – or halt – advances in blockchain and cryptocurrencies.

The Outlook

Regulation will make a big difference to how start-ups raise funds and how investors make money. Much of what blockchain start-ups do falls into already-regulated territory – it’s just that the regulators haven’t caught up with events yet. Our industry has to recognise that regulation is coming like it or not. We embrace it or we fall foul of it.

As agencies – like the SEC in the USA – start to make moves against what is going to amount to illegal activity other actors in the blockchain community are reading the writing on the wall – and taking positive steps to help create the safer working, innovating and investing environment that would be so good for our industry.

What’s more, in banking there are trillions of dollars-worth of financial products that are ripe for tokenising. That’s too good to pass up on. But the financial world is highly regulated – if one of blockchain’s next steps is to thoroughly upend banking and finance then it absolutely has to be ultra-compliant. Our industry is already recognising regulation as an opportunity for wide-scale mainstream success and is taking increasingly bigger steps to be regulatory-friendly.

Conclusion

The danger is that the rate of new token offerings carries on at breakneck speed with none of the dangers being addressed. If serious players in the blockchain/cryptocurrency world itself don’t speak highly of the quality of new offers then what is industry and the wider public to make of it?

Thankfully, it looks like our industry is sufficiently self-aware that it not only recognises this but is willing to act on it.

The blockchain/cryptocurrency/token industry is still in its infancy. As with any big new disruption the early days are full of mis-steps, opportunities and people looking to exploit loopholes. But loopholes close, people grow wiser and as the industry matures we can expect the wrinkles to be ironed out.

We’re moving in that direction. Various regulatory bodies across the world are recognising that new coin or token issues resemble other, regulated activities and are expecting rules – that usually protect both firms, investors and users – to be obeyed. As attention grows scammers will be regulated out of contention, foolish investors will have fewer opportunities to burn their money and firms issuing new tokens will have to provide concrete product ideas in order to attract serious-minded interest.

This is all very good for blockchain technology and cryptocurrencies.

And remember, when the hype is done and the dust has settled what underlies this industry is a powerful, innovative, problem-solving blockchain. And that’s not going anywhere.