December 27, 2016
Over the past two years, distributed ledger technology (DLT) has seen tremendous interest by investors and financial institutions alike. There have been numerous variants of the technology coming up, both on the enterprise and consumer side. However, owing to the ecosystem scale of the technology, it is not surprising that enterprises and technology giants of the likes of Microsoft and IBM have been the most aggressive backers of DLT. But what about the impact on the consumer's side? Can we satisfactorily conclude that bitcoin has been the clear winner in attracting consumer interest in blockchain? In order to answer this question, we need to shift our attention from the currency use-case of DLTs to use-cases where consumers stand to benefit from the project in non-monetary ways. When such projects working on DLT reach out to like-minded consumers for funding, it comes under the purview of Initial Coin Offerings.
Initial Coin Offerings, like the phrase implies, works like an open/access-based offering of crypto tokens which are registered on the provider’s blockchain. The rules of usage of these tokens are decided by the governing body of the DLT project. Consumers have been traditionally investing in alternative assets (think bitcoin) for higher returns, with ICOs, it may be the case that the investor is backing the idea behind the DLT project or the investor is a regular user of the product/service on offer. The recent ICO (also referred to as crowdsale) organized by First Blood Technologies, a decentralized e-sports platform attracted 465.3K in ether to build next-generation products and services. A rather controversial example would be that of the DAO (decentralized autonomous organization) crowdsale where investors put in over $150 million in at that time’s ether value for DAO tokens, which could then be pledged to buy a stake in DAO’s investee companies. There have been political campaigns taking the cryptocurrency route, like the Trumpcoin, a cryptocurrency that pooled funds to back Trump’s Presidential campaign. However, the credibility of the same hasn’t been ascertained yet.
ICOs or Initial Coin Offerings are public offerings of crypto-tokens that back some blockchain platform/project or business.
Equity crowdfunding can be seen as a special case of ICOs where the token on the sale itself represents shares. That being said, it is vital here to note that the legal framework to accommodate digital tokens as the right to ownership is yet to be laid out. In other cases, ICO tokens can either merely denote the unit of value to use the product/service on offer or can be treated as straightforward investments in alternative cryptocurrencies.
Nevertheless, the crypto tokens issued via ICOs have attracted some criticism and scrutiny from the lawmaker lobby owing to their fundamental parallelism with financial securities. A crypto token, unless registered with the regulatory authorities, does not qualify as something which has any existence save that which is recognized by a court of law in the context of an action (a proceeding or lawsuit). A chose in action is a right to sue. Debts, shares, and other documentary intangibles fall within this category of property. This effectively blurs the lines between ICOs and Ponzi schemes where the former, with some wrong intent, might jeopardize investor protection rights in the name of technical superiority.
The interesting thing to note here is that ICOs bear the promise of bringing a better product in a faster way by rapidly securing funding while cutting through the red tape. There are also chances that one ultimate consumer product outpaces the incumbents in terms of creating large ecosystems on public blockchains. However, considering the pace and scale these projects operate on, there’s still some leeway – probably a decade or so – for the regulators and lawmaking bodies to define what a crypto token includes. The regulations for ICOs, if and when they arrive, would be pivotal in shaping the consumer-side impact of the DLT, especially in disrupting FinTechs that offer consumer-facing payments and banking services.