SEC reducing signal to noise ratio for ICOs

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Last week our theme was “Is a 51% attack a real issue?

Our theme for this week is “SEC reducing signal to noise ratio for ICOs.”

Bitcoin’s price has jumped close to 30 percent since last weekend, peaking at $5,300 on several big crypto exchanges. Reports in the news attest that the recent surge was triggered because of buy orders for 20,000 Bitcoins, worth $100 million. With 412 days to go until the block reward halving, some analysts are claiming this is normal and historically Bitcoin price tends to surge a year before its halving starts.

Last year was a brutal for everyone in the space. The free fall we witnessed, truly tested our beliefs in cryptocurrencies and their potential. While I think that at some point we’ll see Bitcoin and other cryptocurrencies go far beyond December 2017 prices, I don’t think that we’ll see it happen the same way it did before. I expect that we’ll see some bullish runs, followed by selling pressures that will make us take a couple of steps back, but always settling on higher ground, each time.

Despite the fact that most of the news this week is focused on crypto prices, the big story is about the SEC clearing the air about ICOs, that want to sell their tokens in the US. The SEC issued its first “no-action” letter, allowing ICOs to sell tokens in the US, under certain conditions.

TurnKey Jet, a jet-leasing business, got the SEC’s “approval” to sell its token in the US, without having to register with the regulator, as long as:

  • Token holders won’t be granted an ownership stake in the company.
  • Any funds raised from the token sale will not be used develop the platform or app.
  • When the tokens they are sold,  they must be usable immediately for their intended functionality.
  • Transfers of the TKJ tokens are restricted only to TKJ wallets. External wallets are not allowed.
  • TKJ tokens will be priced at 1 USD per token. Each token will essentially function as a pre-paid coupon for TurnKey’s air charter services. If TurnKey wants to buy back the token (coupon), it must do so at a discount (less than 1 USD).
  • The token must be marketed in a way that emphasizes its functionality, and not its potential to increase in value, over time.

The SEC’s letter resolves some uncertainty about ICOs, but at the same time hugely limits them. You won’t see TKJ tokens on an exchange like Binance or Coinbase. The non-transferable nature of TKJ tokens, makes their actual utility extremely limited.

Earlier this week, the SEC also released “Framework for ‘Investment Contract’ Analysis of Digital Assets.” The framework is interesting, because it gives some guidance to new token issuers, whether a token is or isn’t a security.

The crypto industry has been pressing the SEC for a set of rules that companies can follow. Both the No-Action Letter and the Framework are reasons only for reserved optimism, if that. They are non-binding, as far as future decisions are concerned. The Framework states: “… it is not a rule, regulation, or statement of the Commission, and the Commission has neither approved nor disapproved its content …”.The crypto market in the US can be harmed by lack of or bad regulations.

Does it make sense to do an ICO, STO or IEO?

In 2018, 1,132 Initial Coin Offerings (ICO) and Security Token Offerings (STOs) were successfully completed, twice as many as in 2017 (552 in total), as shown in the fourth ICO / STO report by PwC Strategy in collaboration with Crypto Valley Association (CVA). ICOs raised $11.4 billion in 2018!

Fundraising for Initial Coin Offerings in Q1 of 2019 has been declining, based on data from TokenData. ICOs only raised $118 million so far in 2019, a huge drop when compared to the $6.9 billion raised in 2018, in the same period. Dropping prices and volatility have been deadly for ICOs.

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The declining prices of cryptocurrencies, were not the only reason people did not invest in ICOs. People found other vehicles… STOs gained popularity in the cryptocurrency industry. Although, STOs are not fundamentally different from ICOs, they are a more regulated version. In the end it boiled down to regulation.

The first 2 STOs that started the idea in 2017, raised around $22 million. In 2018, STOs grew exponentially to 28 and $442 million in funding. In 2019, the dominant trend is STOs and asset tokenization, the conversion of real-world assets to the blockchain.

But, the biggest problem for most STOs, is finding an exchange capable and verified to list security tokens. Imagine an STO by a company in Asia, listed on an exchange in the US and a trader from Europe that wants to buy or sell the security token… A regulatory nightmare!

We are seeing even more changes to the ICO landscape, because of the problems with both ICOs and STOs. Initial Exchange Offerings (IEOs) are like ICO’s, with one difference, fundraising takes place directly on a crypto exchange. At its core, an IEO is basically an ICO but run through an exchange, as the intermediary conducting the sale. The first ever IEO was Tron’s BitTorrent, that raised $7.2 million in 15 minutes on Binance’s Launchpad platform.

In 2018, a staggering 58% of ICOs did not manage to raise $100,000 and only 2% of all ICOs announced their token was listed on an exchange. Potentially IEOs could be a game changer for the crypto market.

The long-awaited SEC ICO framework and its impact on the ICO landscape (and IEOs), potentially makes it easier for startups to raise capital. But it has left many questions unanswered, so we’ll have to see how it plays out. There are plenty high-quality projects and teams in the crypto market right now. Clearly defined rules and regulations, make the process much more transparent, credible and let crypto investors sort through all the noice.

For now… baby steps, slow and steady!

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Ilias Louis Hatzis is the Founder & CEO at Mercato Blockchain Corporation AG. He writes the Blockchain Weekly Front Page each Monday.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

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