ICOs & the New Gold Rush
The other main theme at the conference was “New Money Everywhere”. The money is coming from Initial Coin Offerings, or ICOs. This discussion around ICOs permeated nearly every conversation and session held at the event. While I had watched ICOs over the last eight months, I had not bought into the idea completely. For background, the ICO is essentially like an Initial Public Offering (IPO) whereby in the a company raises funds by going public via an offering of stock to the public, usually through an investment banker. That stock is then listed and publicly traded over a public exchange; the company must also register with the Securities and Exchange Commission and make regular public filings.
With the ICO, however, a company raises funds via their own website in a crowdfunding-like manner. Often, they post a whitepaper describing their business and how they plan to use the funds — not unlike a IPO’s initial documents. The magic here is that the fundraising leverages the Blockchain to store the information about who contributed, how much and when. The process of storing the aforementioned information securely on the distributed ledger uses “Smart Contracts” which is an enormous development in this space (again, more on this later).
Current regulation in the space is generally non-existent. However, to avoid the suspicion of impropriety and any confusing regulations, companies have designed it so that if you wish to invest, you “donate” your funds via Bitcoin or Ether (the second most popular cryptocurrency). Once you offer your Bitcoin to them you are typically given shares in the company referred to as “coins” or “tokens”. Those electronic coins bought at the ICO rate are eventually listed on publicly traded cryptocurrency sites.
Recently, this is where the mania has ensued, and the millionaires flush with digital currency dwell. Often investors see a huge bump in price when their coins hit the exchanges, followed by a seesaw movement in valuation until the next ICO is released. Traders tend to be fickle as they move in and out of flavor-of-the-month coins and onto the next shiny ICO. These offerings now seem to happen multiple times a week compared to handful a month last year.
Typically, these ICOs have an open window for people to invest for a week or two but one company called EOS which specializes in “Decentralizing Everything,” will have their ICO for the next 360 days. When making a donation to invest in the fledgling company they offer rather large numbers of digital tokens for Bitcoin or Ether. In the example of Civic, which is a secure identity platform, they requested US dollars for their token, called a CVC, at a rate of one token for 10 cents, with a typical order of $1,000 netting the buyer 10,000 tokens. As an order of magnitude, people that bought in would have made seven times their money in about a week, as the currently CVC token is now valued at 70 cents.
The amount of money invested in ICOs is remarkable. While at the conference, the value of all companies’ combined tokens or coins was pegged at more than $100 billion dollars! This valuation was in the few billions not long ago. Put another way, all of the companies who have launched ICOs are worth more than Morgan Stanley at $78.3 billion. according to current stock valuations.
As you may have gathered, there is tremendous opportunity with ICOs for law firms, in-house counsel and government agencies. Blockchain practices within law firms have emerged across the globe, specializing in assisting companies with the process of the ICO. Cooley, PerkinsCoie and Holland & Knight are three innovative firms that have highly specialized attorneys working in this space.
The amount of money invested in ICOs is remarkable. While at the conference, the value of all companies’ combined tokens or coins was pegged at more than $100 billion dollars!
Also, many regulators are carefully watching from the sidelines which was a point of discussion during the event. To that end, some firms are providing guidance in areas considered confusing for all parties: Federal and State money services law, privacy and security, Intellectual Property and Money Laundering as it pertains to these cryptocurrencies and to Blockchain.
While the eruption of these coin offerings are in general considered to be very positive, lately there have been some challenges. Not unlike what happened during the dot-com IPO boom of the late-1990s, the ICO market is increasingly seeing potential phantom companies that are trying to leverage this mania to turn a quick buck without a real business case. In the coming days or months we will likely see an ICO go very wrong, resulting in thousands of people losing millions of dollars and ultimately upsetting the entire ecosystem.
At that point, several aspects of the legal industry will begin to take shape — first and foremost, there will be a call for regulation both domestically and internationally. Beyond that, I would foresee possible class action lawsuits following, also not unlike those that followed the dot-com bust of the early-2000s. Recently ICOs have strictly forbidden citizens of some countries (mainly the U.S.) from participating in their offerings for fear of lawsuits.
The Initial Coin Offering is an incredibly exciting use of Blockchain technology for business and individuals. The Blockchain’s use of the smart contract to record information, execute actions securely and in a distributed manner is revolutionary. At this moment in time, the technology slashes the middle man in what was a very profitable business once reserved for the big banks and whale investors. With that said, we are in early days — so while billions of Euros, Dollars, Yen and every other major currency races toward these new company ICOs, the legal industry is charting a path to assist… or eventually, help sort through the wreckage.