The crypto world is far from a state of consensus on what ICOs will look like in 2018–Ripple CTO Stefan Thomas recently predicted the demise of ICOs on CoinDesk, while investment site SeekingAlpha declares (with caveats) that “ICOs are the future.” What seems certain is that this dynamic tool will continue to evolve.
Government intervention in the ICO market seemed inevitable by July 2017, when the SEC announced its intentions to regulate ICO tokens as securities if they qualify as “investment contracts.” The New York Law Journal predicts that while late 2017 mostly saw SEC actions against blatantly fraudulent ICOs or tokens clearly designed as securities, 2018 will see the agency ramping up to investigate less clear-cut ICO arrangements.
One of the SEC’s first actions in 2018 was to freeze the assets and ICO sale of “crypto-bank” AriseBank. While some might bemoan the intrusion of regulation into the “Wild West” of crypto, enough ICO fraud happened in 2017 that more are praising the introduction of basic oversight to protect investors. Increasingly sophisticated government regulation that protects investors without inhibiting innovation and growth will also hopefully cause the reversal of some of 2017’s more draconian regulations, such as China’s total cryptocurrency ban.
Many of ICO’s most dire naysayers qualify their pessimism with the caveat that adequate regulation could preserve ICOs as a useful financial tool. Asked if ICOs will begin to mirror IPOs in 2018, and if IPO-like increased government regulation will impact IPO development, blockchain startup Dispatch Labs’ Chief Marketing Officer Ivan Goldensohn responded:
“Yes. ICOs will begin to require higher levels of scrutiny, transparency, and will in many ways move towards some, but not all, of the trends in the IPO world. This is actually a good thing for the companies like Dispatch Labs, which have real products, full-time dedicated teams, and applications launching with existing user bases. It will not be a good thing for those ICOs made up of smoke and mirrors, and that is a good thing for the industry in general. We need to find a balance: having enough systems, regulations, and industry standards in order to ensure legitimacy and improve the quality and expectations of companies to succeed within the space are important, but not adopting the unnecessary complications and waste that exist in parts of the IPO/VC world is equally important.”
Fewer Bonuses and more Traditional Investors
ICOs in 2017 and earlier have tended to reward early investors with a bonus value, often a percentage of tokens on top of what they’ve bought. In the early days of ICOs, these bonuses were considered essential for incentivizing early adopters. But ICOs aren’t having as much of a problem finding early adopters as they used to.
Coin Telegraph reports that the annual fiat fundraising accomplished by ICOs increased by a factor of almost 40, from $96.3 million in 2016 to about $4 billion in 2017. CoinDesk reports that ICO fundraising exceeded IPOs for the first time ever in June 2017. This headlong rush into investment is both exciting and worrisome news – Quartz reports that a new ICO named “Useless Ethereum Token” raised over $40,000 in just three days, despite transparently being attached to no product and launching as a joke.
A side effect of this exuberant investment in 2018 is likely to be fewer bonuses, companies simply don’t need to use them as incentives when even joke ICOs can make money. Another side effect of the rush to invest will be increased mainstream investing, as traditional venture capitalists realize that IPOs face a significant rival in the fundraising world.
Though ICOs have been and will likely continue, at least for the foreseeable future, to be high-risk investments, writers at BlockDiscover predict that their impressive competition with IPOs will attract venture capitalists who previously turned up their noses.
Higher Bars to Successful Fundraising
The ICO world is getting crowded–CoinSchedule reports that 235 were launched in 2017. While it may seem like the investing world has infinite cash to pour into these offerings, that money supply will eventually become more discerning.
This is especially the case for mainstream investors used to practicing due diligence as required by their employers and governments. FindLaw has provided a checklist documenting the exhaustive due diligence procedure legally required for launching an IPO in the US, a list that dwarfs the information typically (and entirely optionally) given by ICOs to their potential advisors.
While ICOs may not have to jump through quite such intensive regulatory hoops just yet, they might want to start providing more evidence of a feasible product in order to attract investment from both seasoned venture capitalists and crypto-buyers investigating a more crowded market.
Lawrence Wintermeyer predicts in Forbes that ICOs will become “professionalized” as more investors demand transparency and validation before handing over real cash. Less serious investors might be well-advised to follow their lead: Bernard Moon advises prospective ICO buyers, “Don’t be Dumb Money,” winding up holding a bunch of ICO tokens for a company that never actually makes a product. The Merkle reports that about 90 percent of ICOs lack use cases months after their crowd sales. That’s not going to be a sustainable situation for much longer.
ICOs are some of blockchain’s most exciting and riskiest products right now, both promising real change in startup fundraising and sometimes implying that a bubble isn’t far around the corner. If more regulation and due diligence tame some of the more unpredictable elements of ICOs, they can hopefully continue to be dynamic tools for driving innovation in 2018 and onwards.
How do you think the ICO landscape will change in 2018?