Past and present

Once upon a time, there was an uncluttered ICO landscape. Entrepreneurs and investors alike were drawn from small communities of enthusiasts and a solid understanding of the technology was necessary in order to participate, an activity that was cast more as support or a vote of confidence than an investment. Even during this age, some of the difficulties of ICO structures and governance were becoming apparent. ICOs provided entrepreneurs with unprecedented access to funding, enabling some great projects to progress, but key balances and safeguards were missing. Minimum Viable Products, team token vesting structures, transparency and controlled release of funds were all deemed necessary by the end of 2016, but the industry was far outpacing these sober voices.

In 2017, the number of ICOs on offer and amounts raised through them increased dramatically. Since then, it has seemingly become easier to be a Weekend-ICO-Warrior. The pure hype of ICOs resulted in irrational investing and a deviation from the fundamentals — that research and sound judgement are the key to investment success — so far as to create an exception. Indeed, by late 2017, “If one had blindly invested €10000 in every visible ICO, including the significant number of ICOs that failed, this would have delivered a +13.2x return.”

Those days have since past. Increasingly, one is having to play the part of a VC, not only to identify legitimate projects (always difficult even outside of the blockchain ICO ecosystem — see Juicero), but to make an educated call on the market and business prospects.

Some have proclaimed that 80% of all ICOs have been scams or have otherwise failed to deliver any returns (similar to startups). Regardless of which definition of a scam or failure you choose, one can agree that criminals, fraudsters and opportunists have taken advantage of the hype. This has poisoned the well for legitimate projects to some degree. There are however some positive takeaways, namely the flight to quality and the focus shifting from hype and speculation to due diligence and viability. There is a lot of talk about institutional regulation and surely this is on the way, but in reality it will take time to develop the proper regulatory frameworks. The great ICOs are actually far ahead of regulation in terms of transparency and holding themselves to high standards, partly because of the community culture, and partly because it makes good business sense to do so.

Still, for those that wish to participate in this emerging industry as it accelerates, it is necessary to invest responsibly, expertly applying cold judgement in order to realize returns.

Momentum

Monthly ICO raised capital [USD million] for all completed ICOs.

The amount raised by ICOs continues to grow, though there appears to be a consolidation taking place after the activity in 2017. Anecdotally we have seen a number of projects delaying until market conditions turn and become more favourable. A decrease in new ICOs is perhaps expected in severe market declines which may indicate a coming rise given the improving market sentiment as of mid-April.

The word however, is out. No matter the short term activity, ICO funding for blockchain has surpassed that of venture capital and major projects like EOS and governments like Venezuela (in the face of extreme doubt) are making bold moves into the space. The decentralized opportunity to participate in incredible projects as investors is here to stay, the only question that now needs to be considered is whether the same mechanisms will be used and whether investors need to position for any changes to the current nature of the ICO.

Climate

There have been many developments in the first half of 2018 from regulatory, industry and country-specific perspectives. The pace of these developments, even from governments, is far in excess of what has been seen in the traditional business landscape, which is indicative of the agility and efficiency new technologies are bringing and encouraging.

The CEO of Binance (which has recently overtaken Deutsche Bank in quarterly profits), has said that ICOs are not only a positive phenomenon but a necessary one. Echoing the growing sentiment that the much greater and less cumbersome access to capital for talented entrepreneurs is something sorely missing. Particularly in economic areas where entrepreneurship has been identified as a key opportunity for upliftment, but where government and private initiatives have failed miserably.

The SEC Commissioner has warned against a blanket ICO classification, suggesting an open-mindedness and an understanding of some of the nuances in the industry. She urged that regulators “evaluate the facts and circumstances of each offering.” Which is broadly in line with CFTC Commissioner Giancarlo’s position on cryptocurrencies — that regulators owe the next generation a careful and measured approach, not a dismissive one.

Ripple has been handed a class action lawsuit that will be closely followed given the role it will play in establishing key legal precedents from which the SEC will take guidance. The SEC is in the process of investigating and issuing statements for the purposes of clarifying how ICOs fit into existing rules and regulations that industry participants are bound to.

A group of South Korean lawmakers is moving to have the current ban on ICOs lifted. South Korea is an important market for cryptocurrencies in general and the popularity of the industry is not being ignored by government. It is supposed that recent announcements like Bithumb (one of the country’s largest exchanges) planning to hold their ICO in Switzerland are pushing the government to decide on these issues. This challenge is the same for governments globally, where stability and regulation are balanced against the immense economic opportunities that may be missed by a tardy or heavy-handed approach.

It is clear that ICOs have harnessed a technology and culture that has imparted capabilities previously unseen. These have proven to add immense value and therefore cannot be ignored nor completely confined by regulators in individual countries. Regulators are therefore, quite admirably, stepping up to the task of understanding ICOs and assisting in the much needed task of legitimizing and stabilizing the industry. In a perhaps unfamiliar scene it is the business world that is lagging in fully appreciating the changed landscape. The large incumbents chase buzzwords but are still seeking to control, gain dominance and extract profit. Perhaps a more open culture of collaboration will seep in through acquisitions or examples of successes by other means.