Initial coin offerings(ICOs)) have taken financial markets by storm raising more than $3.5 billion this year. The excitement around ICOs is only matched by the fears of scams and fraud in the space. Those fears have caused different countries to ban ICOs and the US Securities and Exchange Commission(SEC) to launch a cyber crime unit with a special focus on digital currencies and ICOs. As a result, the SEC has started criminal proceedings against a couple of phantom companies including the infamous Plexcoin.
The bad actors and market manipulators in the ICO space are the consequence of a new and fast growing financial exchange vehicle. Labeling the ICO ecosystem as fraudulent because of those bad actors is just misleading. A lot of fraud has been committed using US dollars or any of the established financial channels in today’s markets( stocks, options, FOREX…). As ICOs evolve, new mechanisms will be implemented to prevent market manipulations. I would like to explore a few ideas that might help in that area.
The Biggest Advantage: A Programmable Foundation
Implementing more transparent and ethical ICOs is far from being an easy endeavor. However, the programmable nature of ICOs provides very unique advantages to achieve that goal compared to traditional financial channels.
ICOs can implement enhancements or new features using blockchain smart contracts which enable not only faster iterations but a more resilient and trusted environment. In that context, new regulatory features in ICOs should not only manifest themselves as processes but also as smart contracts that can be programmable used by the rest of the ecosystem. If we follow that reasoning, there are a few ideas in the traditional venture capital(VC) and public equities markets that can be extrapolated to the world of ICOs. Let’s explore some of my favorites:
1 — Token Vesting
Vesting is a well-established concept in VC rounds that allow shareholders to vest their stake on a company based on a specified schedule. A similar concept concept could be implemented as smart contracts that can prevent token holders to cash-out all their tokens on day one of an ICO.
2 — Different Types of Tokens
Publicly traded companies often use different classes of shares to represent specific rights of shareholders like voting. In the same way, ICOs could consider issuing different types of tokens that differentiate between token-holders and grant more influence to certain individuals on the company’s decisions.
3 — Crypto-Brads: Token Holders Voting
Important decisions in venture-backed or publicly traded companies are typically delegated to the board level. We could simulate that concept using smart contracts that allow token holders to vote on relevant decisions such as capital allocation, token distributions, investments and others.
4 — Blockchain-Based Company Performance Indicators
Transparency is a key feature of blockchain technologies so why not use it to improve the transparency of ICOs. Blockchain smart contracts could be used to publish relevant performance indicators or documents of the company that can be relevant to guide the price of tokens.
5 — Programmable Regulation
The topic of regulation is sensitive among blockchain enthusiasts but lets’ assume that some level of regulation will be needed to legitimize ICOs. Why bring regulators into the blockchain world then? Imagine that entities like the SEC implement smart contracts to enable the automatic registration of ICOs and subsequent disclosures. It seems like an interesting concept to use the strengths of the blockchain as a regulatory mechanism.