Illegal ICOs, Paris Hilton and the End of the World

Paris Hilton supports an ICO the same week as the People's Republic of China determines that Initial Coin Offerings or ICOs constitute ‘illegal fundraising.’ Back in the United States, contact with the SEC forces Protostarr to refund their ICO investors. Bitcoin is dubbed ‘the best example of a bubble’ by no other than bubble researcher Robert Shiller. And if Bitcoin isn’t sufficient, TokenMarket is tracking over 335 different types of alternative cryptocurrencies. This is either the best of times or the worst of times for cryptocurrencies. We are on a brave new path or the world is ending, depending on who you ask (cue Jamie Dimon). So should you buy a water purifier and run for the hills, or stay put?

Well, to begin with, whatever we think about bubble talk, we need to recognize there is a certain mania around all sides of these topics and most information around these complex issues is fundamentally simplified and unreliable. As with any contested topic, partisans usually search out the information that supports their view. The difference here is, with financial transactions and agreements, there is no substitute for sound legal advice.

The level of basic understanding around Bitcoin (a virtual currency), Blockchain (a distributed ledger technology), Ethereum (a currency ether and a blockchain), Altcoins (alternative virtual currencies) and initial coin offerings or ICOs (a token sale of a new virtual currency) – all of this is still vastly low. And it’s not simple to understand either. Some ICOs track securities in underlying assets and some are purely digital products.

Due to the lack of knowledge and the inherent tangles in the new market, transparency and data become highly valuable to all market participants. We need to have clear understandings of the products at hand and their structures. Indeed, anything else may result in severe backlashes and hamper the development of these new innovative products.

It’s clear that ICOs are still evolving as financial products and while they certainly can be transformative in a fundraising context, they are still immature. Most ICOs are conducted by NGOs out of Switzerland’s Crypto Valley in Zug with favorable and supportive regulation, with several other territories around the world (see Singapore and the British Virgin Islands) formalizing new types of frameworks. As one would expect with financial products and tools (including regulators), ICOs and cryptocurrencies are establishing and adopting best practices around AML and KYC checks.

Whether this is sufficient to appease the powers that be is still up in the air. The SEC has indeed taken a more active view on cryptocurrencies and ICOs as of late and is widely expected to issue guidelines and investor protection safeguards for these transactions. The SEC and some its officials have taken a decidedly dim view of them. It is possible to conduct an ICO in the United States if it is treated as a securities offering and executed in accordance with the rigorous federal and state securities laws in the United States, but this may be unappealing and prohibitively expensive. As it comes to Bitcoin and the bubble, Shiller emphasizes the larger-than-life story behind Bitcoin and its mysterious creator Satoshi Nakamoto as a parallel to other bubbles he has researched. The way I’d personally look at it, is on the path of any new currency looking for legitimacy, similar perhaps to the currency of an emerging market country. The fact that it is electronic does not necessarily fundamentally shift the fact that it is a currency and indeed needs to find its support from the market, as any type of traditional currency would. It is true, of course, that traditional currencies aren't created overnight in the same way that some cryptocurrencies and altcoins are, which certainly leads to instability and a lack of legitimacy.

When the market trend itself becomes a self-perpetuating story and participation due to a fear of missing out (Bitcoin is up X% today, get involved!), whatever the market or asset class is, you can see a certain behavior and pitfall in market behavior.

Whatever your own personal take, it is significant for both new and traditional financial markets that ICOs have raised hundreds of millions of dollars in minuscule time windows compared to traditional financing roadshows. In the grand scheme of things, this development has only just started and there are several debates to be had about how we find the appropriate balance in the end products.

As the final point, no, you should not take a celebrity’s actions as a signal of a golden investment opportunity. Take it rather for what it is, a combination of the halo effect and herding behavior – neither is new to the investing market, and neither is productive.

Whatever the investment mechanism, the underlying merits of the deal are what truly matters. If you want to speculate on currency or if you want to participate in an ICO, then whatever your course of action, you should keep your eyes on the underlying deal. Do your due diligence and research the deal on its merits. Read the documents. Be sure that the agreements are legal and enforceable. Understand what you're actually buying and what your rights are. Base your decision on that, not on whether Paris Hilton thinks it is cute.