Not many people boast a resume like Steven Seagal: martial arts instructor, Hollywood film actor and director, musician and the face of a Russian arms manufacturer. The latest — and perhaps most surprising — twist in Seagal’s colourful career has seen him become the brand ambassador of Bitcoiin2Gen, a cryptocurrency which launched an initial coin offering (ICO) in January.
Seagal’s backing of Bitcoiin2Gen confirms the rapid evolution of the ICO from a little-known and obscure Blockchain funding mechanism to a multi-billion dollar industry endorsed by celebrities. Socialite Paris Hilton and boxing champ Floyd Mayweather are among other celebrities to have promoted ICOs.
The latest offshoot of the rapidly evolving cryptocurrency space, ICOs enable start-ups to raise funds by issuing coins or tokens using Blockchain technology that are exchanged for virtual currencies such as Bitcoin. A digital mutation of the initial public offering (IPO), an ICO allows an enterprise to raise funds quickly and relatively easily by bypassing the legal and regulatory requirements governing traditional IPOs. Funds raised are often used to develop Blockchain technologies and projects in the early stages of development.
And the sector has seen an explosion in growth amid surging cryptocurrency values. Total ICO funds raised in 2017 amounted to more than $5.4 billion, according to CoinDesk, in a year that saw 343 offerings. That compares to just $256 million in 2016 when only 43 ICOs were completed. The rapid growth in the space shows no signs of slowing in 2018, with more than $3 billion already raised by March, according to CoinDesk.
Recent ICOs include Hong Kong-based Blockchain investment platform BnkToTheFuture, which said it raised $33 million in its February 2018 offering. The second stage of the offering, a public sale of 30 million BFT tokens, sold out in just two minutes and 17 seconds, according to its website.
But leading the charge in 2018 is Telegram. The messaging app raised an initial $850 million in the first stage of its offering in February, according to an SEC filing – making it the largest ever ICO. The company is ultimately looking to raise $1.2 billion from its ICO to develop the TON Blockchain.
The rapid expansion of the ICO market is set to be given a further boost as more institutional investors enter the fray in 2018 — something that could put the sector on a whole new growth trajectory altogether.
But the recent flurry of ICO activity has raised concerns about the dangers they pose to investors and triggered calls for regulatory oversight of the sector.
And Seagal-backed Bitcoiin2Gen, which has just been slapped with a cease-and-desist order by the state of New Jersey for allegedly selling unregistered securities, illustrates the two sides of the initial coin offering.
Indeed, while the ICO has fully emerged from the shadows, it remains a controversial funding mechanism. Debate rages over whether the fast-growing space represents a transformative force for good or a disaster waiting to happen. Proponents hail the ICO as a viable and more sophisticated alternative to venture capital or crowdfunding and something that will help democratise the fundraising process and make it more accessible. But its detractors argue it is an unregulated and dangerous sector that exposes investors to fraud, criminality, capital loss and extreme volatility.
Arguably, both proponents and detractors have valid viewpoints. The ICO spectrum encompasses at the one end legitimate enterprises that have generated large returns for investors and at the other end criminal players that have left investors high and dry.
The fraudulent fringe of the sector plays host to exit scams where cryptocurrency companies raise funds through ICOs before vanishing with investors’ funds. A recent example is cryptocurrency start-up LoopX which, after raising $4.5 million from its ICO, erased its website and social media presence and completely disappeared.
Meanwhile, the industry has witnessed the birth of a satirical sideshow that has produced a strange and surreal assortment of comical ICOs. One such example is The Useless Ethereum Token ICO, which is essentially a joke website warning investors of the dangers of such offerings.
“You’re going to give some random person on the internet money, and they’re going to take it and go buy stuff with it. Probably electronics, to be honest. Maybe even a big-screen television. Seriously, don’t buy these tokens,” says the Useless Ethereum Token website on its homepage.
But despite the warnings, the Useless Ethereum Token reportedly generated more than $340,000 in an ICO last year. And according to its website, contributions keep coming in.
Another satirical brand is the Order of Ethereum which allows investors to purchase “deity tokens” for forgiveness of sins. “Buy Your Way to Heaven” its website says. Again, the website makes clear the whole thing is a joke and people should not spend money with it.
The rise in ICO exit scams and satirical brands has, however, arguably acted as an incentive to professionalise the sector. Some ICO projects have recruited top Wall Street talent and technology experts to lend credibility to their offerings and provide reassurance to potential investors. The CEO of Trade.io, which raised $31 million from its 2017 ICO, is Jim Preissler, a Wall Street veteran previously of UBS. And some enterprises are offering vast sums of tokens to attract the best and brightest in the land in an echo of the pioneering dot com companies of the late 1990s which gave new recruits very attractive stock options.
With the ICO space containing both legitimate enterprises and fraudulent scams, regulators are presented with the difficult balancing act of promoting and encouraging viable ventures and rooting out and eliminating unscrupulous scams.
But the problem is that ICOs largely operate in an unregulated space. While regulators around the world have expressed concern about the potential for consumer detriment, countries have adopted widely different approaches – with some issuing outright bans (China and South Korea), others regulating ICOs on a case-by-case basis (U.K.) and others looking to bring them under securities regulations (U.S., Switzerland). And some jurisdictions such as Taiwan are actively embracing and facilitating ICOs to spur economic growth and transformation.
The lack of a consistent, joined up approach is acutely evident at the European level, which would benefit from a pan-European set of regulations similar to how UCITS funds are governed.
In the absence of consistent rules, market participants face a gruelling two-pronged task: that of navigating a complex minefield of international currency and security rules while also abiding by a diverse patchwork of guidance released by different regulators with differing agendas and approaches.
Ultimately, a global market that facilitates speedy cross-border digital transactions needs to be governed by a specific and robust set of internationally-agreed regulations. Until we have an international framework or country-specific ICO regulations, it would seem prudent to establish some basic rules for the market. And incorporating some ICO tokens into existing securities regulations – an approach adopted by the U.S. and Switzerland – would act as a good starting point.
Meanwhile, potential investors should exercise caution. Those considering investing in an ICO should do their homework and fully research the offering and project to be financed. And also understand that a project that has the backing of a high profile celebrity will not necessarily succeed.