Crypto crowdfunding’s global nature is the key to its future
By Rakesh Sharma
Given the past year in crypto, you’d be forgiven for assuming that the market for initial coin offerings is dead. Government agencies worldwide have cracked down on ICOs, causing the market to plummet from sky-high fundraising levels during the 2017 hype cycle.
But don’t write ICOs off quite yet.
In fact, according to Bloomberg, ICOs raised $292 million in January 2019 alone. That’s a far cry from the $5.6 billion raised in June 2018, but it points to a persisting interest in these types of offerings amid an overall slump in cryptocurrency markets.
This continued interest has confused more than a few industry virtuosos. “What boggles my mind is that token holder pressure hasn’t prevented entrepreneurs from wanting to avoid this sector,” Lex Sokolin, global director of fintech strategy at Autonomous Research, told Bloomberg. “Imagine having thousands of upset traders yell at you on social media all day long.”
Today’s ICOs present a risk-reward trade-off that continues to attract entrepreneurs: the promise of “easy money” in a global marketplace versus the headaches of dealing with crypto investors.
The big picture for ICO funding is still not good, though. The major tracking services agree that funding capsized the last year — and has yet to recover. Venture capital, meanwhile, which took a backseat during the ICO boom, has also pulled back into the lead. ICOs may have raised $19 billion last year, according to Coinschedule, but VCs pumped $52 billion into new startups.
What caused the ICO boom to collapse?
ICOs may offer several advantages to entrepreneurs, they also come with significant regulatory risks. For one, lawmakers in the United States have mostly kept entrepreneurs in suspense over the legal requirements for offerings. The answer to arguably the most important question – whether an offering token is a utility or security – remains at the SEC’s discretion. The agency has chosen to go after certain offerings while providing other networks with the necessary runway to ensure their tokens can be classified as utility tokens.
The same story is playing out around the world, with agencies coming to different conclusions and offering radically divergent paths to legitimacy.
Of course, when discussing the ICO boom, one cannot ignore the scammers. The promise of easy money has been a siren song for dubious characters since the invention of money itself, but ICOs gave criminals easy-to-use tools for scamming investors. According to research from Satis Group, an astounding 80% of all ICOs are scams. But, 83% of ICO projects fail within the first four months, and when the market soured, token funding dried up and investors and entrepreneurs alike faced a hard dose of reality.
There’s also the price of Bitcoin to consider. Since the beginning of last year, BTC’s price has shed approximately 75% of its overall value. The broader cryptocurrency market fell even further, down 82.6% from the beginning of last year.
Statistics like this have increasingly made investors unwilling to take a chance on crypto.
Global factor means hope is not lost
Most industry experts agree that ICOs are unlikely to see another bull market on the level of 2017. That’s why everyone’s got their eyes on the ICO’s regulator-friendly cousin, the STO, or security token offering.
These less-chaotic offerings are appealing to institutional investors who appreciate crypto’s benefits, but cannot accept the high risks of ICOs. A recent survey of institutional investors by the Global Blockchain Business Council (GBBC), a Swiss nonprofit to promote blockchain, found that 41% of its respondents were planning to “enter” token sales in the next five years.
Entrepreneurs are wise to this, and it’s reflected in the offerings themselves. In the U.S., for example, many crypto startups are selling tokens via private placements that comply with the SEC’s Regulation D. In other jurisdictions, similar steps are taken to adhere to local laws.
For those who don’t want to — or don’t have the resources to — comply with SEC’s regulations, there’s a new spate of sales that use a modified version of crowdfunding on Ethereum’s blockchain. Donors to these campaigns are rewarded with tokens for later transactions. They can sell, trade or use the tokens on the platforms. A crowdsale token does not grant a share of future profits or rights to investors. BitTorrent, a peer-to-peer file-sharing network, recently raised $7.2 million this way.
Perhaps most importantly, the epicenter of crypto fundraising has shifted away from the United States. The Bloomberg report states that just 12 ICOs were held in the last quarter of 2018 in the U.S., roughly half from the year’s first quarter figure of 22 offerings. However, globally, offerings fell to just 111, from 113, during this same period. The United States’s loss is Europe’s gain: Switzerland and Eastern European countries have capitalized on America’s regulatory uncertainty by writing laws that provide clarity and certainty for token sales.
In the end, the boom and subsequent bust in ICOs may have been good for the industry. Bad actors are being weeded out even as countries around the world are setting the building blocks in place for its future growth. “The ICO model is not going away,” Jack Platts, a spokesperson for the Web3 Foundation which has an ICO planned later this year, told Bloomberg. “The ability to raise money from anyone globally in a pseudo-anonymous way is still compelling to a lot of projects, and some version of it will be used long into the future.”