ICOs: A Giant Scam or a New Financial System?
Juan Villaverde is an econometrician and mathematician devoted to the analysis of cryptocurrencies since 2012. He leads the Weiss Ratings team of analysts and computer programmers who created Weiss cryptocurrency ratings.
In “Ethereum Myths Debunked,” I showed you why the teams behind Initial Coin Offerings (ICOs) are not the cause of Ethereum’s recent decline. Nor are ICOs dead or dying.
Today, I look to the future. I explain how, despite the many scams and failures, ICOs are opening a path toward a new, more modern financial system.
But first, a quick refresher on how it all works …
Currently, Ethereum is the go-to network for ICOs. It acts as the functional equivalent of a computer operating system. Like Microsoft Windows or Apple iOS, it provides the platform, the environment.
Then, the tokens sold via ICOs are roughly the equivalent to applications, like Microsoft Word or Apple iMovie. But instead of regular applications (Apps) that run on a single computer or server, they are decentralized applications (dApps) that run on a network like Ethereum’s.
Why Most ICO Investors are Understandably Frustrated
Put yourself in the shoes of an ICO investor, and you’ll readily understand their frustrations.
You see Facebook with billions of daily users.
You hear about the blockbuster videogame, Fortnite, with daily usership in the millions.
Then you compare those big successes to the results achieved so far with dApps created with the money you’ve invested in ICOs: They don’t even come close!
In fact, Dappradar shows that all an ICO needs is 300+ daily users, and that alone will get them into the Top 5 of any category.
Adding insult to injury, you see that the tokens you bought so eagerly have plunged in value almost across the board.
So you ask: “Where the hell are the killer dApps? Who in the world can claim to have conquered a particular industry function or consumer activity?”
Answers: Nowhere and no one.
No wonder some observers are claiming that the ICO concept has failed! No wonder they’re questioning the entire business model of issuing tokens through a distributed ledger platform!
They have every right to raise the questions. But they’re too quick to jump to conclusions.
Here’s What’s Really Wrong with ICOs …
They’re sold as a hybrid of a donation and a security. But in reality, they’re neither.
Virtually none of the organizations selling the tokens are registered as charitable institutions. So you can’t deduct the money from your taxes. And they’re clearly not donations in the official sense of the word.
At the same time, virtually none of the organizations have registered the tokens as securities. So if you own the tokens, you get no shareholder rights, no voting proxies, no dividends, no accountability whatsoever.
The companies could lose every penny you’ve invested and never report back. Or they could just sit on the money and never do a damn thing for months, for years or forever.
Worst of all, they could make tons of profits and never share a penny with investors.
There’s nothing to tie a token, or anything bought at the time of ICO, to the underlying success of the company. In most cases, investors get strictly a “utility token” that is loosely connected to the business.
Now do you see why it has been such a disaster?
But does that mean that the entire concept is dead on arrival … that ICOs are merely a passing fad?
Far from it!
What most investors have apparently forgotten is that ICOs are still in the experimental phase. Since 2016, they have been beta-testing the use of Distributed Ledger Technology (DLT) to help in mass crowdfunding. That’s it!
The fact that there was an investor frenzy, followed by an investor panic, does not, in itself, mean that it was either a success or a failure.
Nor does it stop the next phase …
Standardized Security Tokens on the Near Horizon
Indeed, it’s only now that the experiment is about to come of age with the introduction of security ICOs.
Like the ICO utility tokens that prevail today, these new assets will live on a distributed ledger platform, such as Ethereum, EOS or NEO.
Each will have its own ticker symbol and market prices.
And all other functions will resemble those of traditional stock markets, but with some key outstanding differences:
They will be far less constrained by national borders.
They will be fundamentally more inclusive, transparent, decentralized and incorruptible.
And as such …
Security ICOs promise to make traditional Initial Public Offerings (IPOs) look like antiquated relics by comparison.
Right now, for example, only the most well-capitalized and securely funded corporations can list their shares on major exchanges and offer them to the investing public. (Just look at this post for more insight into the challenges they face.)
It takes months or years to gear up for, and launch, an IPO. And Big Four accounting firm PwC estimates that companies pay 4%-7% of gross proceeds, plus an additional USD 4.2 million of offering costs directly attributable to the IPO.
In contrast, to launch an ICO, you can simply create an ERC20 token — the Ethereum token that’s most commonly used — in 15 seconds flat.
You go to a website. You pick the standard features you want. And with a few mouse clicks, you’re done.
Your cost? As little as USD 1.
That’s right! Seconds instead of years; one dollar instead of millions!
These security tokens will offer the same perks and guarantees as traditional stocks. Plus, they will do so far more efficiently — without the intermediaries, expensive fees and arcane procedures that only insiders can hope to understand.
And they will be available to virtually EVERY business — no matter where in the world, no matter how small or out-of-the-box.
How Big Can Security ICOs Become?
For the answer, just think back to the beginnings of ecommerce. Remember its trials and tribulations. And also remember how many so-called “experts” predicted it would be just another “failed experiment.”
Then look how big it is today! Note how Amazon has virtually vanquished brick-and-mortar retail chains. Observe how ecommerce has invaded and conquered not only B2C sectors, but also many B2B businesses.
Finally, imagine a world in which Ethereum-like ICOs invade … and mostly replace … the world of IPOs and then create NEW markets that don’t yet exist today.
It will happen. There’s absolutely no question in my mind.
It’s just a matter of how fast and how it will be regulated, two topics for a future article.