Considering an ICO... then read this


  • Business
  • Saturday, 25 Nov 2017

You may get the green light if you have a solid business case for the use of digital currencies

INITIAL coin offerings (ICOs) are still all the rage despite some regulators coming down hard on them and big names talking them down as just a big bubble or scam.

The ICO euphoria is likely being fuelled by the fact that despite all the negative news surrounding ICOs and cryptocurrencies, the price of bitcoin has generally kept soaring, despite the many mini crashes it tends to suffer.

Hence, companies (and entrepreneurs with a business idea, half-baked or not) are considering launching their ICOs. And why not? You get to raise money sans all the laborious securities laws that come with taking a company public.

But is it that easy? Here’s the thing to note. Assuming that you belong to the “wild west” of this blockchain era – meaning the people who believe that a cryptocurrency like bitcoin will replace all fiat currencies and central banking authorities – you will have some challenges.

For starters, who is going to promote your ICO and who is going to buy into it? Interestingly, this possibly explains the presence of some “ICO advisers” at the recent Fintech Festival in Singapore, reportedly the world’s largest fintech gathering.

This writer even had the good fortune of bumping into a US-based consultant who called himself an ICO investment banker, but with a namecard of an unheard entity that didn’t at all resemble any traditional investment bank.

For sober markets like Malaysia and Singapore, the regulators’ stance is clear. They are not outlawing ICOs but making a simple statement: if fund-raising is your main objective, then please take note of existing securities laws, which have been built and refined over a very long time.

What gives tech companies the right to all of a sudden bypass that?

The Malaysian regulator has made an effort to legitimise platforms offering equity crowd-funding and peer-to-peer (P2P) lending. There is also the recently launched Leading Entrepreneur Accelerator Platform or LEAP Market. So, the regulator is merely saying, why aren’t you looking at these options first? But that is not to say that ICOs are banned in totality. And this is where it gets interesting.

Those who have a deep understanding of blockchain technology and the problems it can potentially solve (I’m just at the beginning of this curve) will explain to you that there is a need for a new token created in that network to sort of “power” up that blockchain.

This is best explained using a simple example. Let’s take the case of a fintech company that is building a P2P remittance solution. Simply put, it is creating a platform in which it is trying to match parties moving currencies in and out of countries so as to minimise expensive and arguably unnecessary bank fees. So, a Malaysian SME wanting to pay US$50,000 to a party in the US for some raw material can be matched with other parties wanting to bring back US$50,000 into Malaysia.

The platform matches the parties and makes the necessary collections and payments into the banking accounts of all parties, without having to incur exorbitant overseas remittance fees that banks traditional charge.

For starters, this platform can manage their settlements using emails and excel spreadsheets. But when it grows to a bigger size, it will only make sense to power the network using blockchain technology.

And the next step from that would be for all participants in this network to participate using a particular digital token for their payments in and out of this network. This would reduce costs, make it more efficient and going by the proponents of blockchain technology, much safer, traceable and accountable.

But going back to the main point about ICOs, it is only when you have such a solid business case (and a platform that is already up and running and showing revenue) for the use of cryptocurrencies that you are likely to be seen as a kosher candidate for an ICO.

If it is mainly just to do a quick fund-raising with a technology story that does not make much sense, then regulators are likely to be worried, and rightly so. And while many believe that the regulators are too slow to play catch-up with this new ICO phenomenon, don’t be so sure.

They have many levers to pull if they have doubts about your ICO. They could blacklist your company, instruct banks not to allow any opening of accounts related to your ICO (and shut down those believed to be linked) and worse, haul you up for breaching securities laws.

Notably, Bank Negara’s recent decision to deem cryptocurrency exchanges as reporting institutions is another example of what the regulators are doing to ensure that cryptocurrencies are not abused by bad hats.

Malaysia should not become a hotbed for dodgy ICOs.

 


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