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David Siegel had a problem. For years, the American entrepreneur had been working on an idea: an open-source platform, called Pillar, which would allow people to remain in control of their personal information by piggybacking on the blockchain — a digital decentralised ledger underpinning cryptocurrencies such as Bitcoin.

But when Siegel pitched his company Twenty Thirty to venture capital firms, he was met with blank looks. Investors weren’t interested in Pillar, and Siegel couldn’t get funding to build it.


After months of rejections, Siegel decided do something different: instead of phoning just another investor, he resolved to get help from future users.

On 15 July, he is going to sell 560 million “tokens” — digital units of payment that will be necessary to use Pillar, once it’s ready — in exchange for ether, an up-and-coming cryptocurrency exchanged on public blockchain Ethereum. His target is the equivalent of $50 million; if that sounds like a lot, be aware that Pillar’s “token pre-sale”, some days ago, raised $4 million worth of Ethereum’s currency, ether — in 34 minutes.

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“I couldn’t raise any money for Twenty Thirty from investors, because they didn't get what we were doing; now we have ordinary people hammering our email about Pillar,” Siegel says. “These people really want to fund this open source project.”

Siegel’s fund-raising model is called Initial Coin Offering, or ICO — and you might have heard of it, as it is the latest big thing in the frenzied world of cryptocurrencies.


An ICO’s functioning is simple: a team with an idea, but short of funds, use blockchain technology to issue a certain amount of digital tokens (aka “coins”) sold in an auction to people paying in ether, Bitcoin or, seldom, regular money like dollars or pounds.

Apart from rare cases, tokens’ only ostensible function is allowing their holders to use the platform that issued them: they could be used, for instance, to buy storage space on a Dropbox-style service, or converted into special objects on a gaming platform. They are the equivalent of coupons for a supermarket under construction.

But tokens often grow into mini-currencies in their own right: they are traded for cryptocurrency or fiat on blockchain marketplaces, and the more successful their related project grows, the more valuable its tokens become. This dynamic is inevitably attracting a great deal of speculation.

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The mechanism has been around for a while — the first instance was MasterCoin in 2013, followed in 2014 by Ethereum’s first ether sale, and more recently by the ill-fated autonomous VC firm The DAO — but it really surged over the first half of 2017. Tens of projects have amassed millions of dollar within days, hours, or seconds, with superstars such as blockchain architecture firms EOS and Tezos soaring over $150 million and $200 million. In June, bitcoin news website Coindesk announced that funds raised through ICOs had overcome VC money as the first source of investment in the blockchain sector in 2017. “Tokens” might sound like Monopoly money, but their impact on the real world is growing by the day.



The question is: why? Ask people in the field and they tend to reflect two main narratives, one optimistic, the other decidedly sceptical.


The positive one is that ICOs are a new, smart way to finance projects that struggle to get VC’s backing.

Etienne Brunet, an investment executive at FinTech VC firm Illuminate Financial, points to investors’ recent interest in private blockchains (members-only ledgers banks and financial institutions are experimenting with) as the root cause for ICOs. “In 2016 it was very hard to raise funding unless you were doing private blockchains,” he says. “So, all the people trying to build open source projects for the public blockchain had to find a new way to get funds.”

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That view is shared by Jamie Burke, the founder and CEO of blockchain-focussed VC firm Outlier Ventures, who calls ICOs “the blockchain ecosystem’s killer app.”

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The way Burke sees it, ICOs are finally lowering the barriers to entry for technology investment, as whoever has some cryptocurrency can join the party; more than that, coins’ speculative potential is allowing open-source projects to raise more funds than ever before.

“The point is that now, for the first time ever, open-source initiatives can be profitable for investors,” he says. “Previously, they were relying upon donations and they were inherently unprofitable — people would just do them for an ethical goal. Now there is a financial incentive for people to participate.”

There is a stick-it-to-the-man undertone behind this take on ICO: the idea that smart, independent teams are raking in millions from the anarchic crypto-crowd to take on blindsided VCs and bank-loving private blockchainers. And increasingly, ICOs are being used by companies outside of the blockchain field, such as messaging service Kik, which portrayed its upcoming ICO as a last-ditch attempt to compete with juggernauts such as Facebook.

Burke has no doubts where this leaves traditional investors. “The VC model is dead,” he says. “Over time people like us will stop being the main source of capital. VCs will become more like auditors. I’ve got people in ICOs saying, 'We don't need your money, what we want is your validation.’”

Still, Burke admits that, while this is the direction he sees ICOs evolving over the next few months and years, the current state of affairs is far from optimal.

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“Most of the projects which have launched ICOs are poorly designed and won't scale,” he says. “But I look past that: I still think we have the ability to kick-start this new economy.”

That brings us to the second narrative, which portrays the ICO frenzy as a massive speculation game, or worse.

ICOs might have lowered barriers to entry, but most token sales are dominated by a handful of large investors —“whales” in crypto parlance — snarfing up almost all the cake. In the $35 million ICO for Brave, a browser created by Mozilla co-founder Brendan Eich, only 130 people bought coins — and half of them were purchased by just five buyers.

Although most projects specify — risibly— that tokens are “not for speculation”, token speculation is at the core of ICO’s success at raising so much money so quickly. Big crypto owners are throwing money at token sales hoping that coin value will increase in the short run, diversifying their crypto portfolio in the process.

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“The point is: if you have $200 million worth of bitcoin or ether, what should you do?” Illuminate’s Brunet says.

The side effect is that millions are going to entities which, apart from tokens and a project outline — crypto parlance: “white paper” — have very little to offer. Take for example “Useless Ethereum Token”, a parody initiative which still managed to raise $40,000 in funding. Or, for a grimmer story, look at OneCoin: a Ponzi scheme which had amassed over $350 million before being busted by the Indian police.

Some of the more obvious security problems are being addressed by the crypto community at large: it has been recommended that funds from ICO be locked in an escrow mechanism — giving access only to limited sums after milestones have been reached — in order to prevent crypto heists. And Ethereum’s wunderkind guru Vitalik Buterin has turned to game theory to suggest some tips for designing fairer ICO auctions, such as as splitting them up in smaller, spaced out sales over time.

The elephant in the room, has to do with financial regulation: with tokens being auctioned, traded, and speculated on as if they were securities, should we regard them and regulate them as securities? (The fact that ICO is even phonetically reminiscent of IPO, or initial public offering, is hardly a coincidence.)

In most countries, the answer would be no: if something is not formally a security, it won’t be treated as such. But that is different in the US, whose security regulation extends to “investment contracts” — defined in a landmark case (centered on an orange orchard in Florida) as investments made with an “expectation of profits.”

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Whether that applies to tokens— bizarre entities that have a sort of intrinsic value (as theoretical payment units) but are also being flipped around like stocks, is anybody’s guess. Right now, the US Securities and Exchange Commission has been silent on the matter, explains Peter Van Valkenburgh, a researcher at blockchain-focussed think tank Coin Center.

“SEC’s default position is ‘we're proceeding cautiously because, while we are worried about investor protection, we're not certain this is within our purview, and we don't want to stifle innovation’,” he says. “There's no indication that anything is gonna happen in the very short term.”

If SEC did decide to do act any ICO project which has sold coins to US citizens would have to comply with much more stringent regulation. That is probably why many current ICOs are labelled as “not for US investors”. (Ontario’s authorities recently warned that blockchain firms might be breaching the Canadian region’s financial laws.)


For the time being, ICO’s real challenge is whether it can thrive without being a pain in the side for the blockchain ecosystem itself. ICOs are likely behind the recent spike in the value of ether — with investors buying the cryptocurrency in order to take part in token sales; ICOs might also be behind ether’s sudden 30 percent drop in value, as many ether-loaded projects are converting their ICO-generated ether into fiat currency to pay their staff.

And the Ethereum network itself — which less than one year ago went through a traumatic restructuring following the collapse of The DAO — is being put under strain by the ICO onslaught, as relentless, massive volume of transactions generated by token sales commandeer the ledger’s computing power.

But that is not necessarily a bad thing, Van Valkenburgh says. “It could be a way to battle-harden the network: there have been issues with transaction delays and scaling because of the popularity of ICOs put strain on the network,” he says. “But if the blockchain has to grow, ICOs are a good way to test the infrastructure.”