2017 has definitely been a record-breaking year for ICOs: a fiat equivalent of some $4 bln have been raised, and the number of successful token placements have increased to a couple of hundreds globally. Yet, in the same year, traditional IPOs are estimated to have raised $188.8 bln in total of 1,624 deals, according to E&Y IPO Global trends report. Only in third quarter, 2,645 venture capital deals amounted to $42 bln.
ICOs have raised less about two percent of global IPO proceeds, but ICOs not IPOs, and not venture capital deals, are the talk of the street these days. Why?
In one year only ICOs proceeds have surged almost 40-fold, from $96.3 mln in 2016. In 2014- 2015 the amount was microscopic. More than 180 new ICOs are scheduled to launch in 2018, according to ICObench listing.
It would be superficial and arrogant to explain the ICO explosion only by desire of newly-rich crypto-miners to invest their unexpectedly reevaluated digital assets in something productive and to protect themselves against volatility. It may be the case, but it doesn’t explain the whole case. In fact, there are three root causes of ICO success.
The good reason
ICOs and cryptocurrencies exploit fundamental flaws of the traditional funding methodologies. They bring justice and equality to projects from underprivileged geographies, sectors, and don’t rob founders’ share while doing so.
Traditional financing is tilted towards an intermediary, not a creator, and it is designed to lower the risks of that intermediary, not the investor or founder while maximizing intermediary’s yields. It basically works around the principle of Matthew 12:15 – “Whoever has will be given more, and they will have an abundance. Whoever does not have, even what they have will be taken from them.” Simply saying, it takes money to get more money.
Classic venture financing is orders of magnitude harder to achieve for those who live outside global hub cities. Most US funds won’t even consider financing an enterprise not domiciled in the US. Venture capitalists normally claim a hefty part of the equity in exchange for the money, so investors, irrespectively of their share, greatly influence the decision making of the founding team, and not always for good.
The first answer to these problems were crowdfunding platforms. ICOs have just made another step towards reducing the friction behind crowdfunding, de-intermediating it further.
The bad reason
Getting venture financing, let alone reaching for IPO afterwards, requires the team to distract themselves from the product development, marketing and promotion. Compliance, legal and due diligence procedures make the auxiliary mission of securing the funds for the project a separate task, as complicated or even more complicated than launching the product itself.
It’s not the only reason behind the ICO triumph.
Despite cyber-anarchists’ wet dreams, states won’t go anywhere anytime soon, and legal norms for ICO didn’t appear out of thin air. As they say in the military, service regulations are written in blood – of those who died to teach others a lesson. Stock exchanges and financial markets are regulated not exclusively to keep the profanes out. It is because most scams, frauds and crashes have already happened there. Sooner or later, ICOs will be regulated. And we should rather be a part of the solution to this problem, not the problem itself.
The ugly reason
In ideal post-Blockchain smart-contract, self-governing, crypto-anarchic world, imagined by technophiles, we should all be singing “Hosannas” by now, praising human progress and ingenuity.
But we wouldn’t be humans if a life-changing invention weren’t used to cheat, defraud and steal. Cryptocurrencies and subsequently ICOs aren’t an exception, and there are and always will be frauds of course. Traditional financing doesn’t necessarily offer substantially better investor protection. Even the most stringent due diligence doesn’t guarantee against fraud. Crypto investment schemes are especially prone to it because of anonymity.
ICO segment is still in its infancy, yet this baby is gaining weight alright. Childhood illnesses are many. First and foremost, crypto world has a severe reputation problem. The SEC calls for extreme precaution when investing in ICOs. To gain trust, we should start from within, and establish it first with the community.
Even in the absence of governmental regulations, self-regulation framework of ICOs will inevitably arise. Moreover, to avoid overregulation and unnecessary intervention of governments, it is essential that the community keeps policing itself better than any regulator. That’s exactly where the sector is headed – otherwise, it won’t survive.
What to expect in 2018
In coming year ICOs will offer more projects to serve the broader community, not limiting itself anymore to the Blockchain infrastructure development, payments and speculative trading. It will less much less revolve around purely financial technology. In 2017, we have already seen examples of Blockchain notary public, Blockchain-based real estate investment, loyalty programs, supply chain management, intellectual property rights management and other real-world applications. We’ll see more of that in 2018.