Individuals who are involved in the blockchain space understand the pace and speed at which the technology, ideas, and regulation are changing. At the forefront of that change is the ICO space.
ICOs in the last couple of years have been one of the biggest catalysts for both the growth in blockchain projects and consequently the downfall for cryptocurrency reputation. 2017 was a year all about innovation and testing out new ideas. The blockchain community was in what we call the “collaborative stage” suggesting that many entrepreneurs didn’t exactly know how the blockchain worked but wanted to be a part of all the hype.
2018 has been a “weeding out phase” which has been very destructive to ideas that just aren’t feasible or necessary to implement the distributed ledger technology. More importantly, 2018 has been very successful in eliminating bad actors from the space while reinforcing the true players in the market. Don’t get me wrong, there are still loads of bad participants in the space—hopefully these next couple of years will fix that.
The reason why ICOs have been so attractive to entrepreneurs is due to the fact that you can raise unregulated capital without any strings attached. The main reason they are allowed to do this is that ICOs are clarified as a Utility instead of a Security. This poses a major issue because most of the ICOs out there is actually a Security! This is a hurdle that governing bodies have to deal with. It’s important to remember, even though the blockchain community is all about establishing a borderless world, national borders still exist and country regulations are not uniform around the world.
If you participate in an ICO and purchase tokens, you technically have few rights associated with those tokens. Sure you can sell them if you find a buyer, but you have no voting rights (in most cases) or real equity in the company. This poses a real problem for investors because ICOs do not have the security needed to truly incentives a broad range of buyers. If the company running the ICO losses your tokens or creates a faulty smart contract, they have no legal incentives to compensate you for your loss. As you can see, this poses an unattractive issue for investors—especially those that have a lot of capital to spend.
One factor that contributed to companies going the utility route of launching an ICO is due to the higher fees associated with legal compliance when adhering to securities law. This requirement needs more capital upfront, so in most cases, a preliminary capital raises to get started.
A not so common work around the security law is for companies to develop a dApp instead, utilizing the Ethereum platform and using Ether as a payment solution. The reason this works is due to the fact that the SEC right now doesn’t view Ethereum as a security. Sure this is a clever way to get around securities law, but you cant work around the endless pitfalls that are commonly associated with dApps. Distributed applications don’t have the scalability to process many interactions without bogging down the whole blockchain (remember what happened with crypto kitties…). Additionally, they aren’t being used! This might change in the future, but for now, dApps are still just an idea without many practical uses.
The ideal option now to appease both the governing bodies and interested parties is to start issuing Security Tokens, or STOs. STOs are almost identical to ICOs except that they actually follow and adhere with securities law. Security tokens make it possible to tokenize securities, so financial assets such as stocks, bonds, futures, equities, swaps, and forwards can all be managed via distributed ledgers. This eliminates a lot of the issues you see with ICOs, which include increasing transparency and security with individual ownership. An STO is similar to IPOs, except that it is completely digital.
STOs are the talk of the town, however, the implementation of one has been tricky. Companies are only now really starting to figure out the proper way to issue a Security Token. There is still a long way to go, but this does seem to be the direction blockchain is going—at least in the medium term.