The battle cry of ICOs – “decentralization” and “inclusion of the masses” is just an illusion, the truth is an ugly picture of unwitting crowd participation in a “closed-loop” eco-system, without any rights or participation to the startup ownership or revenues, according to the BBN Times. Tokens are given in exchange for real cash at the “peril of the giver”, that is, the crowd investors. And what awaits most of these optimistic adopters is the disappointed dealt by a flurry of false promises.
Why is that?
All ICOs are crypto-based with a fixed conversion from the quantified token issuance to tokens that are well known and of which the market cap is significant. Bitcoin owing to its status of being the first Cryptocurrency in the world stands out from the crowd and is directly linked to the transformative Blockchain protocol, however the most popular token in the world is not the main driver of ICO fundraising and tokenomics.
ERC20s “smart contracts” concept has resulted in Ethereum gaining considerably to the point where it is now the most used crypto in ICOs. “Bitcoin is devoid of monetary policy and Central Bank control, it’s pure dynamics of supply, demand, and scarcity,” says Eleftherios Jerry Floros – co-author of The Paytech Book.
The massive rise of Bitcoin inspired investors to create a similar “financial trajectory success story’’ in the form of an “undervalued token” paired with BTC or ETH and priced at least 5 digits behind zero. And initially, most ICOs succeeded in this premise with gains being recorded in multiples of 1 giving early investors incredible returns of x10, x100 or even x1000 and more when the tokens were paired in fractions with either Bitcoin or Ether. But this didn’t last long, when the hype, buzz, “pump & dump” of tokens subsided, token holders were left with worthless and highly illiquid tokens.
Thousands of crowd investors eventually would sell and trade these tokens on the secondary markets – the 24/7 “crypto casinos” of the world – for profit (or loss) to speculate or capitalize on their ICO investments. The “Howey test”, developed to quantify if the ICO “utility token” is a security or not, by determining if the profit motive is applicable, sees an incredible 99% of ICOs failing this test as a result.
The widespread use of CDOs – Collateralised Debt Obligations – that pretty much caused the financial collapse and ensuing global economic crisis most brought about the end of securitization after the economic crash of 2008. One has to buy the “utility token” using crypto in the first place in order to participate in any “closed-loop” utility token system. And even before this transaction, fiat currencies have to be used to purchase crypto. Several AML/KYC hoops have to be jumped through before a crypto account can be verified and a crypto wallet can be utilized for buying, selling or trading of tokens and coins.
“Security tokens will be the transformational game-changer in startup fundraising as it will provide investors with security in the form of equity and revenue participation from the very start,” says Alex Randarevich – CEO of Aerum.
Aerum realized at the beginning itself that a hybrid ICO/STO model that would please both crowd investors as well as accredited investors and institutional funds, was necessary for survival. And this formula is now taking off and being emulated around the world.
The Second Coming
Eleftherios Jerry Floros – co-author of The Paytech Book said that “Money will become a tool for prosperity instead of a weapon for power and greed”. Regulation will play a vital role in expanding the ICO market in the future, at the same time evolving to include various formats and legal structures such as hybrid ICO/STO, DAICO or RICO (Reversible Initial Coin Offering).
Security tokens are the future financial instruments that will allow the masses to participate in promising startups from the very beginning. Security tokens or equity tokens are a regulated way of creating a token and building its own ICO. Unlike utility tokens, security tokens don’t need to have a “utility”. Their use case is that they represent a real share of the company.
Note that the opinions mentioned here are solely those of the BBN Times and their author.