Initial Coin Offering and tokens

In an earlier article, I touched on blockchain, currencies and tokens. These tokens contribute a large part of the data within the blocks. I hope this short explanation will be able to describe in greater detail what a token is. Today, a good proportion of new and existing tokens run off the Ethereum blockchain, though increasingly, the Chinese are starting to use NEO. This is what makes mining profitable and cause the recent mining boom. Crypto-currencies used in tokenisation, such as ether and NEO are popular as miners are required to confirm the data by mining creating real demand for them.

If you were living in your own world, you wouldn’t have missed the commentary has been a lot of flak going on in the virtual world that that Initial Coin Offerings (ICOs) are a scam, and that there were calls to regulate this type of fund raising activity.

Central banks of the world are taking the protective stand ICOs are unregulated type of fund raising. Indeed it is so given the recent utility riding on the Ethereum blockchain being able to support tokens/coins. It is a convenient way for smaller companies to raise funds to test their business case, or in some cases for business expansion which they might otherwise be deprived off in the traditional sense. Most of these companies do not raise a significant amount of money that makes an Initial Public Offering (IPO) financial viable given the massive fees to the consultant, bookrunner and the exchange. Hence, the increased risk is that there is less scrutiny to the business case, management team and financials compared to the due diligence performed by professionals running an IPO

In a typical ICO, buying the coin/token does not make you an investor since there is a connotation to being a shareholder. Instead, token holders are funding the operations of the company by “outright donations”, or buying a product at a particular price. It is then hoped that the company becomes profitable to distribute a return back to token holders regularly or that the product gains acceptance in the real market causing its price of the underlying good to appreciate thereby making a profit. This is not to run afoul of the new regulations imposed by the Securities and Exchange Commision, the People’s Bank of China and the Monetary Authority of Singapore on the definition of what constitutes a security and how it can be marketed.

Notwithstanding this, the vibrancy of the ICO market is unparalled as far back as I can remember. There are so many ideas trying to solve issues dear to the founding team’s heart. The screenshot below is testament to the types of proposed solutions being bandied around, ranging from securing online identity to e-payments solution to logistics to serving the online gaming community.

Screenshot courtesy of www.coinschedule.com

As an example, a recent ICO involving a Singapore based FinTech company that issues debit cards secured by crypto-currencies, TenX, raised about USD 100 million in total through the various rounds of funding. What was eyebrow raising was that they raised USD 34 million in 7 minutes from token buyers were from all over the world  at the speed that is faster than a traditional IPO. The ICO was sold out. In. 7 minutes.

Outlook

It is healthy to see the many initiatives and the kind of support that the global online community can offer to make the project a success. However, the attitude should be one of buyer beware as such ICOs do not offer the same type of protection and recourse to the token holder as compared to a typical shareholder. The ICO marketspace is still at its infancy but inherently capitalistic in nature. Not every project will make it, but for those that can, the payoff to the founders and the supporters will be massive.