ICOs: Two birds One stone

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The digitization of financial services means that we are at the very early stages of tackling two significant social impact topics (Jason Bates says “Digital Banking is only 1% done”):

Financial inclusion – mainly in the “Rest”

Tokenization of the economy – on a global basis

Since the tokenization of our economies is really nascent, we are at risk of thinking of different aspects when we hear the term. We are even at risk of dismissal altogether of this emerging reality, from those that see this as fraud, exuberance, a fad. Jamie Dimon, a Greek immigrant that made it on the billionaire list, being one of them. Others, look at the thousands of tokens that have been issued (over 6,000 and growing as we speak) and the ever-increasing ICO rounds (over $250mil lately) and are naturally, worried about this young market.

There is room for all these concerns but the market will grow and advance with or without our opinions, thoughts, and concerns. The reality (including stumbles and crashes) will be exactly as Richard Olsen, co-founder and CEO of Lykke describes it and as David Siegel, CEO of 20|30 and the Pillar Project, quotes in the opening of his in-progress e-book The Token Handbook:

There won’t be millions of tokens. There will be millions of kinds of tokens. Richard Olsen

Today we are mostly focused on the thousands of fundraising tokens with a just a few functionalities, like tokens that represent ownership, or some rights, or rewards, or incentives.

Tokens are not only alternative fundraising (crowdfunding) weapons that make VCs stay up at night because of fear of extinction; as some like to believe.

Tokens will enable network effects and the creation of ecosystems, we cant imagine with the current business processes. These are the “other kind” of tokens that Richard Olsen is referring to, I believe. So, stay tuned.

The Zurich ICO summit organized by Smart Valor

For now, we mostly see crowdfunding kind of tokens and most of them can’t answer the question “Why this token?” without admitting that it is a quick, techie way to crowdfund and “acquire users” or it is an existing app that is tokenizing its self. Actually, in many cases, ICOs look more like Initial User Acquisition Events – IUAs. In some cases, like Civic which already had an app, the ICO was a cheaper way to KYC and onboard users and at the same time finance their growth (Civic can answer clearly the Why question).

What is important to keep in mind is that the technology of ERC20 tokens that has clearly facilitated the explosion of ICOs, isn’t going to help in building a community (be it developers or users) and therefore, there is no magic way in building “Network effects”.

A token sale can be a financing tool and a user acquisition tool! But it is not panacea for network effects.

Smart Valor, founded by Olga Feldmeier (ex-Xapo), organized the first ICO summit in Zurich with an amazing lineup of speakers from around the world. I was able to watch part of the conference which was streamed live. From the opening speech of William Mougayar and then some of the topics and angles during a few panel sessions.

Smart Valor is a blockchain venture that is focused on the tokenization of all kinds of alternative investments (real estate, funds, private equity etc.) on a decentralized platform that can make them accessible to Emerging markets. In other words, private banking kind of financial services for EM. You can hear more about the value proposition in this interview.

William Mougayar, the keynote speaker, reminded us that June 2017 was the first month that ICO funding ($600) surpassed the total seed-angel fundraising ($500mil). He shared his insight that on Sep 1. the market cap of cryptos was around $172billion and the amount from ICO crowdfunding was $1.7bil. This shows that ICOs were 1% of the total market cap. So clearly, there was simply a shift (diversification maybe) of 1% from cryptos into ICOs.

He reminded us that Ethereum ICO’d in the summer of 2014 and Ether started trading only one year later (summer 2015) when the network went live. Will this be one aspect of the self-regulatory standards that ICOs adopt going forward?

Here is my collection of self-regulatory standards to be considered. A few inspired from the panel discussions and a few additions of my own.

  • No more white papers, unless they are exceptional highly computational academic breakthroughs
  • No more token trading before the protocol or the app is live
  • More Smart tokens that release funds as milestones are achieved
  • Allocation of tokens with the whitelist technique (i.e. KYC users-signup and guarantee a minimum token allocation) so that communities are built and whales don’t dominate.
  • Avoid Slack and Telegram for pre-ICO community building because they are vulnerable to phishing (Chainalaysis reports $250mil have been hacked to date).
  • Ventures that can answer the “Why the token?” question with a vengeance, join the IGF.

Miko Matsamura from Pantera Capital (a San Fran. $100M ICO-only fund) highlighted a new self-regulatory effort the ICO Governance Foundation (IGF) which is an international organization and Swiss Foundation whose mission is to protect global ICO investors and facilitate capital formation for ICOs. It aims to create something like S-1 filling for ICOs. The Crypto Valley Association (CVA) also issued recently a code of conduct around ICOs.

Panel participants here. Source of original image

Efi Pylarinou is a Fintech thought-leader, consultant and investor. 

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