Dec 7, 2018
When the Ethereum blockchain came online in March of 2016 (the first stable version) it ushered in a new era in funding for startups. Easily created “coins” or “tokens” on Ethereum’s public blockchain allowed virtually anyone with an idea to raise funding from global sources with little or no interference from regulators.
The ICO (Initial Coin Offering) was born and quickly filled headlines with skyrocketing valuations, unheard of returns, and eventually a crescendo of criticism from skeptics. Shrewd investors were routinely seeing 100x plus returns in as little as a few weeks. It was a massive boom that has almost as quickly gone bust.
According to the research firm, Inwara, in Q1 2017 there were 35 ICOs. In Q2 that number jumped to 4,810, and in Q4 it jumped again to an astonishing 6,906 ICOs. By the end of Q3 in 2018, the number of ICOs had dropped to 417 due to heightening regulatory action, nosediving valuations, and a punishing drop in price for retail investors.
While it lasted, the boom was a relative goldrush for the well-connected and the wealthy — as well as for the more opportunistic token issuers. EOS, a new blockchain project, raised over US$4B before they even had a live product. However, countless “retail” investors who had flocked to the regulation-free opportunity to invest in the next big tech wave have (so far) lost out.
In Q4 2018, the ICO and utility token markets look to be on life support with little or no expectation of recovery. Legitimate projects are mired by bad press and deep questions about whether or not their utility token is in fact, a security and therefore at risk of punitive action from global regulatory bodies, including the SEC — especially after two projects, Paragon and AirToken, were fined $250k each and ordered to buy back tokens and convert to securities.
Naturally, there are some projects that will survive the crash. The next Amazon or Google may even be among them. But the vast majority of ICO-led startups are likely to fizzle over time.
According to Alex Vazini of AmaZix, “While utility tokens make sense for a specific subset of applications, last year’s utility token experiment has shown us that this subset is much smaller than initially believed.”
During the ICO explosion a small subset of fundraisers also saw the potential to issue and manage capital raises on the Ethereum blockchain: except instead of doing an ICO, they decided to do an STO, or Security Token Offering. The STO “coin” or “token” in fact represents ownership of a registered security, making it a digital security, or DS.
SPiCE VC was one of the first fully tokenized VC funds to issue a DS. “We saw the insane amount of money being raised on the Ethereum blockchain, but we also knew that raising capital for a business was, and always will be, considered issuing a security. We also immediately saw the potential for digital securities due to their numerous advantages over traditional securities, so it was very obvious for us what we should do,” said Carlos Domingo, Co-founder of SPiCE VC and the CEO and Co-founder of Securitize, a compliance platform for issuing and managing digital securities on the blockchain.
As the nascent DS industry worked to code the Digital Securities so they could be bought, sold, and traded in a compliant way on public blockchains, it became clear that digitizing securities is a massive market opportunity — far, far greater than anyone imagined.
The overall crypto market today is valued at approximately $185 billion, 50% of which is Bitcoin itself, with another 10% belonging to Ethereum and XRP.
Digital securities target a completely different kind of product. “It is a massive market that we are only just beginning to explore,” said Domingo. Wall St. is roughly a $30 trillion market with at least $7 trillion of real-world assets that are ripe for tokenization on the blockchain. Private placement in 2017 was well over $1 trillion in the US alone.
“Projects are making their way into the system,” said Alex Vazini, “We’re seeing a lot of very high-quality digital securities projects come through our doors, featuring all-star teams with experience at C-Level positions in top companies of the traditional world.”
Digital securities are a gateway into asset classes that have traditionally been held captive by liquidity, such as funds, real estate, fine-art, and private equity offerings. DSOs also make capital formation easier by keeping cap tables up to date on the blockchain and allowing for automation of dividends, splits, payouts, investor voting and communication with investors via the token itself.
Digital Securities also make fractional ownership a reality. Andy Strott, Co-Founder of Realecoin puts it this way: “Many digital securities, like the Realecoin digital security, will be divisible into smaller denominations, thereby greatly reducing the amount of money an investor needs to participate.”
The rise of the ICO on the Ethereum blockchain will be remembered for its incredible rise and precipitous crash. But unlike the long list of companies and individuals that rode the ICO wave to its rocky shore, the underlying blockchain technology has the potential to transform regulated capital markets forever.
DSOs are here today, and they are one of the only functional use-cases that has already proven some of the potential advantages of blockchain technology.
The current trend of adoption and enthusiasm points to a future where the world’s assets will be traded via digital securities on the blockchain.