Technical disruptors have been driving our world for a long time, accelerating since the 1960s with mainframes ('60s), microprocessors ('70s), PCs ('80s), the world wide web ('90s) and digital channels such as mobile apps, social media and chatbots (2000s to the present).
But now we could be facing a bigger disruptor with the mainstreaming of blockchain. For those who aren’t familiar with blockchain, it includes a distributed database from which data cannot be removed. In a recent CMSWire post titled “What Is Blockchain and What Does It Do?” reporter David Roe wrote, “Blockchains let us agree on the order of a set of records without trusting a central authority.”
Historically, we have relied on banks to act as trustees to store and confirm ownership of products or software. Blockchain is disrupting this model, acting as a broker between a buyer and seller, always tracking ownership of money and things — including virtual things like software or knowledge. Think of it this way: With blockchain, you could sell your house and digitally transfer the title (or ownership) of the house, with complete trust and confirmation that the ownership has migrated from one person to another.
Blockchain Spawns the ICO
Organizations are testing and working with blockchain, from small startups to multinational corporations, but the most prevalent use of blockchain at the moment is for initial coin offerings (ICO). ICOs allow enterprises to raise money without having to go to venture capitalists (VC) or banks to request funding, a long process that requires them to draw up complex business plans and make pitches. Instead of selling a business plan to a narrow group of investors in hopes of striking it big, enterprises can now crowdsource their funding by creating their own cryptocurrencies, engaging in marketing, building a community behind their offerings and then raising money.
ICOs are quickly becoming mainstream and respected mechanisms for matching investors and donors to organizations seeking funding. Startups and other ventures seeking nontraditional funding raised more than $4 billion through ICOs in 2017.
In addition to providing a vehicle for raising money, ICOs give organizations some independence, allowing them to operate more autonomously, without the heavy involvement of VCs, and free of some of the restrictions that govern bank transactions. With ICOs as an option, organizations can move away from business-to-business relationships and start to include consumers in global crowdfunding initiatives that can be more efficient, more effective and far less expensive than traditional funding mechanisms.
Skeptics claim that most ICOs are scams, drawing parallels between ICOs and the dot-com bubble of the mid-'90s. But because ICOs are increasingly being viewed as securities, there has been a lot of movement on regulating them in the past six months, with Belgium, Germany and Singapore leading the way (more on that later). Expect to see more governments issuing regulatory frameworks in the coming months.
The path to launching an ICO is fairly straightforward. Often, only a team and a concept are required to demonstrate intent to a large audience, and you can easily do that via a white paper, a website or Twitter, Slack or other communication and marketing channel. Here’s a look at some of the steps to take when preparing for an ICO.
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1. Determine Your ICO Classification
Because there is not yet a standard by which ICOs are recognized (unlike, say, stocks, bonds or cash), it is important to understand your ICO. As a result, you should carefully consider and document your ICO’s purpose. That purpose should be consistently communicated in your online marketing efforts and in communications with your target community.
The following definitions are becoming more common. They are based on guidelines provided by the Swiss Financial Market Supervisory Authority (FINMA), which classifies the “tokens” in ICOs according to their intended use and correlate with the level of risk and assurances a consumer takes on:
- Payment tokens: Also known as or currency tokens, payment tokens are treated like cash and are used to make payments to do things like buy a product or make a donation to a charity.
- Utility tokens: Utility tokens are specifically developed to allow access to a digital service, such as blockchain, that allows physical items to be traded for value.
- Asset tokens: Asset tokens represent a promise of money in the future, sort of like the interest you earn on money invested in a savings bond.
It is also possible to create hybrid ICOs with tokens based on combinations of these categories, depending on your objectives.
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2. Identify the Applicable Regulatory Framework
Determining the right regulatory framework for your ICO is critical, because different countries have their own applicable requirements. Some countries have no requirements at all. For example, Russia has no laws expressly created for ICOs.
Others do have regulations, or are on the way to setting regulations. Belgium’s financial regulatory body, for example, has issued statements on ICOs in preparation for upcoming regulations. Meanwhile, Germany has well-defined requirements under which ICOs related to payments are governed by e-money, securities and investment laws. And Singapore has local laws that apply to all ICO operators.
It would be a mistake to assume you must establish your ICO in the same country where your organization is registered or headquartered. Instead, consider the opportunities and benefits provided by registering and operating in a different country. Do this by asking the following questions about the countries where you might register and operate your ICO:
- To what extent is an ICO (or sale of tokens, as defined by the categories above) permitted?
- When do local laws apply to ICOs?
- Is revenue generated by the sale of tokens subject to a corporate tax or local or regional taxes (e.g., the VAT in Europe)?
Weighing the answers to those three questions against the potential size of your market and the number of potential investors or donors, you will be able to determine which country (or countries) offers the best fit for your enterprise.
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3. Identify the Key ICO Risks and Any Mitigating Strategies
Once you determine the regulatory framework that will apply to your ICO, you will be well on your way to successfully running an ICO. Before setting off on the journey, though, consider the following questions:
- Are you likely to encounter any fines or other monetary penalties? If so, how big would they be?
- How will you address any claims for damages?
- Will you have to pay losses to investors?
- Under what circumstances would you need to refund investments?
- What will you do if a suspension of your ICO takes place?
- How will you address the security risks associated with running an ICO, especially the risk of an attack on the computer network supporting it?
Based on how you answer those questions, you might want to consider variations in the token design, the selection of core markets and the number of markets where you offer ICOs. You might also want to consider buying insurance. Taking those factors into account will help you customize your ICO strategy so you have the best chance for success.
A Unique Opportunity
The emergence of ICOs represents a unique opportunity for many businesses, but like any digital effort, it needs to be balanced against potential fallout and the hazards of individual markets. By identifying the right strategy and addressing risks in advance, you can minimize the risks so that you can focus your time, effort and capital on running your business.