Initial coin offerings: investment gift or unmitigated risk?
With the initial coin offering (ICO) craze showing little sign of slowing down, Julian Rogers looks at whether the bubble could be about to burst as more governments move to ban these unregulated fundraising vehicles.
This year has seen an explosion in digital token sales with over 100 initial coin offerings (ICOs) attracting around $1.25bn-worth of investment. There are now up to three of these crowd sales every single week.
For crypto-entrepreneurs, ICOs are a quick way of raising capital besides conventional VC investment for projects built on blockchain technology, and the backers are gambling on these digital assets rising in value over time.
FunFair.io is one of a number of startups in the gambling space to have started issuing cryptographic tokens lately.
A decentralised casino gaming platform powered by smart contracts on the Ethereum blockchain, FunFair.io raised $26m in crypto-currencies in June during a pre-sale of its FUN token.
“It went exceptionally well and we sold out of our tokens,” says co-founder and CEO Jez San. “Since that time, bitcoin has risen in value, and we expect Ethereum to rise as well, so the value has further increased while its been sitting in cold storage.”
Likewise, three-year-old licensed eSports betting operator Unikrn has so far raised more than $30m on its Ethereum-based ERC-20 token, UnikoinGold, during a sale that closes later this month.
“Our token sale has been unprecedented, and we see leviathan interest from both the gaming and crypto communities,” co-founder and CEO Rahul Sood reveals. “Our sales are mostly to smaller buyers – widely distributed in over 112 countries – who are Unikrn users.”
Two years ago, Unikrn created the Unikoin token for betting on eSports matches in markets where Unikrn does not yet have a licence.
The Seattle-based company has turned over more than 250 million Unikoins on its platform and now hopes to achieve $100m from the sale of its own crypto-currency.
Sood and his team are adamant UnikoinGold will become the primary decentralised token for the competitive gaming industry.
Recognising the risks
Despite startups able to bootstrap projects and investors acquiring instant liquidity, ICOs are unregulated and investors are unprotected in the event of fraud or loss.
Unlike an initial public offering (IPO), investors don’t receive shares, an equity stake in the company or any voting rights. Moreover, a number of these token sales have turned out to be bogus investments.
Those left out of pocket can’t complain to the ICO regulator because there isn’t one. Wikipedia co-founder Jimmy Wales was quoted recently in an interview with CNBC as saying that a lot of ICOs are “absolute scams” and people need to be wary.
Meanwhile, chairman of the Securities and Exchange Commission (SEC) in the US, Jay Clayton, recently said some ICOs have the makings of penny stock pump-and-dump schemes. Then there are those startups holding token sales without even a tangible product or a sound business model.
“There are too many ICOs with companies that have no established business or understanding of how blockchain is meant to work,” Sood suggests. “We think the majority of ICOs are set up like securities or are set up to collapse, and they are setting themselves and the community up for massive failure.”
He says some don’t even have a use case for needing a crypto-token other than raising money. “We see ICOs launching where their token is used like a poker chip. It’s sad, really, given the incredible opportunity posed by utilising blockchain technology to its fullest”. He adds: “Any token sold solely to raise money is being sold for the wrong reasons, period.”
Regulatory pushback
Unsurprisingly, certain goverments have been keeping a watchful eye on the ICO phenomenon, resulting in a couple of high-profile crackdowns.
In September, the People’s Bank of China (the central bank) declared token sales to be illegal and banned them, which triggered a temporary fall in the value of bitcoin and other crypto-currencies.
South Korea subsequently also prohibited ICOs, and the prospect of other countries following suit is distinct possibility. Yet if San is concerned about a potential domino effect, he isn’t showing it.
“The naysayers will look foolish,” he states. “ICOs are not going away. It just needs to get better and improve. This is like the early days of the internet – or even the early days of the gaming industry. As for China banning it, well, as the VCs say, ‘we should all invest in everything China bans’, such as Google and Facebook. That’s generally a sign of something really exciting.”
San, who made his name in the gambling world with his 3D poker site, PKR, continues: “No sensible country will ban this stuff now. The rewards are too great. But sensible guidance and light-touch regulation are what’s required right now, and that’s what the smart countries seem to be doing.”
While further government crackdowns would likely cause the ICO bubble to burst, until that happens this form of fundraising, which feels a bit like the Wild West of the investment world, is set to continue unabated.
Indeed, next year is predicted to see $10bn raised through ICOs. “It’s a young market that needs to mature, but there’s every likelihood that ICOs are here to stay and that the issues some are complaining about will resolve themselves,” says San. For him, it’s simple: “This could be bigger than the internet.”
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