Initial coin offerings(ICOs) are one of the most exciting phenomenon in the digital currency world and one that has had the biggest impact in the market since the creation of Bitcoin. Conceptually, ICOs allow companies to raise capital using a crowdfunding model in which they exchange a proprietary token for a established digital currency such as Ether or Bitcoin. In return, the tokens will give ICO investors a special access to the product and can be used as a form of equity in the network.
I plan to cover of the technical details behind ICOs in a future post. Today and tomorrow, I would like to present some thoughts about the implications of the ICO phenomenon from the perspective for the financial and technology markets. Since January, blockchain companies have raised significantly more funds via ICOs than traditional venture capital(VC) channels. as a result, most of the ICO debate has been centered around its relationship with the VC industry. However, I believe ICOs will have a more profound impact in financial and technology markets. Let’s review a few ideas that might help to illustrate that point:
1 — The Difference Between Public and ICO-Based Markets Will Get Blurrier
Companies go public for three main reasons: to achieve liquidity for shareholders, to raise funds and have a currency that allows them to make acquisitions and quantify its valuation. With ICOs, companies can achieve two of those goals: they raise funds and, quite literally, acquire a currency that, although it is not a direct representation of the company’s valuation, it has an indirect correlation to it. From that perspective, as more companies participate in ICOs, the difference between public and ICO-based markets will blurry.
2 — Private Companies Become Tradable
Complementing the previous point, ICOs now offer investors a vehicle to trade in private companies. I believe this will open a complete new segment of the market focused on providing tools and infrastructure to streamline those trades.
3 — New ICO-Financial Products Emerge
I believe ICOs will set the foundation for a new generation of products modeled after the public markets. Hedge funds, index funds, mutual funds, financial/robo advisors are some examples of fintech products that will have an equivalent in the ICO world.
4 — Back to 1611
The first stock exchange in the world opened in 1611 in Amsterdam and, even though is was highly unsophisticated, setup the foundation for public markets. In his famous book “Confusion of Confusions” Dutch trader Joseph de la Vega describe many of the patterns in the Amsterdam exchange that later became established and regulated behaviors. The ICO trend seems to be taking us back to 1611 to a world in which we have the opportunity to write the rules for a new type of financial exchanges and products.
5 — Very Hard to Regulate
Many of the regulated or flat-out illegal behavior in public market is fair game ein the ICO world. Obviously, we should expect institutions such as the SEC to slowly start introducing regulations but that effort could prove to be extremely challenging as ICO markets are highly internationalized.
6 — Living in a World of Ether
The first example in the Ethereum documentation is how to build a new digital currency. Not surprisingly, most ICOs are using Ether as the underlying crypto-currency. As a result, ICOs are already having a deep impact in th eprize and trading behavior of Ether (see my previous article about this topic).
7 — Lawyers and Regulated Smart Contracts are Important
Just like the underwriting process fro IPOs, there is certain amount of legal work that should be delivered as part of ICOs. Some of the most respectable law firms in the world have started to provide services to startups planning ICOs. In my opinion, the ultimate expression of those legal services should be expressed as Smart Contracts included in the ICO itself. This will setup a strong, trusted and completely automated legal foundation for fund raising.
8 — Junk-Bond Style ICO-Based Acquisitions are Coming
Just like stocks are a viable currency for acquisitions, we can see a scenario in which startups use ICOs as a way to finance M&A transactions. That model could be similar to how junk-bonds were used to finance massive corporate take overs in the 1990s. That industry created power houses like KKR but also loved/hated figures such as Michael Milken.
9 — How Long Before we See an ICO from a Public Company?
There have already been several ICOs from companies with substantial backing from VCs. It is only logical to ask how long before a publicly traded company looks to raise additional funding via ICOs. Obviously, there are many considerations to that scenario but the idea is intriguing nonetheless.
10 — Welcome to the Wild Wild West
ICOs are brand new territory for market regulators and many of the established rule sin public markets simply don’t apply in this new world. Being backed by digital currencies, from which there is little understanding in the market, not directly tied to
the valuation of a company and operating in an ecosystem used by some of the smartest cyber-outlaws of the last decade, ICOs offer a blank canvas for market manipulators. However, just as public markets evolved, ICOs will become more resilient and trusted with time.