This form of funding, which allows small business to reach millions via blockchain and cryptocurrencies, is creating a dangerous bubble driven by speculation.
An old saying in investment states that when everyone is talking about how well the stock exchange is doing, that is the time to get out and invest in another asset type. In the small but growing community of Spanish experts and stakeholders of fintech and blockchain, ICOs – the abbreviation for initial coin offering – have recently been on everyone’s lips. And yes, it seems it is time to hit the brakes on these investments: a bubble has been created that has to be burst as smoothly as possible. This was one of the main conclusions drawn at the round table organized by Blockchain España, at Madrid’s Impact Hub, on the phenomenon of ICOs.
But how did this bubble form? What can happen in the medium term? And, what are ICOs, anyway and what have they got to do with blockchain?
ICOs are a method of funding for businesses: instead of a traditional round of funding, or even an IPO (Initial Public Offering), the company offers the market, not shares, but tokens, and their investors pay with digital currencies, such as ethers or bitcoin. This is all done through blockchain. As well as turning their asset into money (always in cryptocurrencies), tokens can allow access to the company’s products or services.
From a legal standpoint, in Spain ICOs are currently in limbo, so current regulations can be applied to them for crowdfunding, securities or for risk capital. Only a handful of countries have taken the ICO bull by the horns, adapting this form of funding to their country strategy, as was the case in Switzerland, Estonia and Singapore.
Yet, strictly speaking, the issue with ICOs is not a lack of regulation. The problem, identified by the experts brought together by Blockchain España, is that ICOs are getting out of hand. “Irrational fever,” “bubble”, and “avalanche of greed” were some of the terms they used to describe an investment spiral that has reached dizzying heights. It is calculated that various blockchain start-ups have already reached $380 million through ICOs.
In theory, as Xavier Foz pointed out, a lawyer specializing in fintech and blockchain from the law firm Roca y Junyent, “anything that opens up an array of funding for companies is welcome.” New projects have resources at their fingertips that entrepreneurs couldn’t even have dreamed of only ten years ago. But the ICO bubble also has serious negative effects, both from an investor point of view and with respect to blockchain’s business and social sense.
The lawless wild west of investment
“These are very interesting times, as we are funding the internet of value, but at the same time there are a lot of scams and speculation,” stated Carlos Kuchkovsky, the CTO of New Digital Business at BBVA. For that very reason, the U.S. Securities and Exchange Commission warned on July 25 that from that day on they would consider tokens issued in ICOs as securities, with the same legal responsibilities for investors.
With this warning, they are trying to end the “call effect” that the interest in blockchain and the success of ICOs is having, leading to all sorts of undesirable acts. It is not unique to this technology: in the analogue world, there have been scandals such as the Fórum Filatélico debacle. But ICOs are dangerously popular. “Some people call and say that they want to start up an ICO to “raise” a lot of money. We are suffering from a senseless fever. It is a regretful situation”, explained Cristina Carrascosa, a lawyer specializing in blockchain.
“We need even more guarantees in all of these processes; otherwise, the bubble will burst in the worst way possible”, said Adrián Calvo, co-founder of Icofunding, a company that deals with managing the starting up of ICOs. Foz recommended that limits be put on fundraising: “Does a start-up need 250 million dollars? Not even Google or Facebook had that,” and highlighted the need for clear rules to be set for the use of that money by company managers.
Carrascosa was particularly critical of the most speculative side of ICOs, “as blockchain and ICOs have a social and cultural component” that is being overlooked. “The developers and programmers that were behind the birth of the internet needed large corporations and didn’t become millionaires; now with blockchain, the situation can be quite different: this property aspect can be acknowledged”.
The risk that the millions that ICOs are attracting is undermining their true function is obvious. “The first thing a start-up should do is ask itself whether or not it needs tokens. Then, whether or not it wants those tokens to be in many hands. Only at the fifth or sixth step should they be thinking about ICOs”, explained Carrascosa.
So, what is the solution? Some suggest an outright ban on negotiating tokens on secondary markets in order to recover their essence: not being a tool for speculation, but rather a mark of confidence in a company that, with a bit of luck, will generate profits. However, as the political and legal decisions begin to be taken regarding tokens, perhaps we should remember, in line with Foz, that a token years ago was used to start up a bumper car. In other words, it was used to gain access to a service, and nobody bought one thinking they would effortlessly become a multimillionaire.