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“Bitcoin has no benefit”, the CEO of Credit Suisse recently said. Many a CEO of start-up companies would mostly likely disagree with Tijade Thiam’s statement, since Bitcoin is really at the core of countless successful financing campaigns in the recent past. More precisely, in the past two years innumerable start-ups have raised not only ten thousand in Bitcoin but also tons of Ether, the second most well-known cryptocurrency in the space. Around these two giants a self-financing ecosystem has evolved, which is nowadays usually called “token economy”.

The defining term representing this new type of economy is the ICO, the Initial Coin Offering. So far 2.3 billion dollars haven been collected by start-ups all around the word at an astonishing fast pace. Conventional ways of raising capital, such as venture capital are lagging way behind. Of the six largest ICOs, which together raised almost a billion dollars, four were conducted in Switzerland.

Blockchain makes it possible

The reason why this new way of financial fundraising has really taken off this year can be found in the new blockchain technology. Companies, which want to start an ICO have to issue tokens for this purpose. These can be described as a cryptocurrency and are mostly subject to programmed contract rules, also know as smart contracts. Investors, who are convinced of a company’s offer and idea and therefore want to participate in the ICO have to send their Bitcoin or Ether to a smart contract. This intelligent contract – another name that is usually associated with a smart contract – will automatically hand out the respective tokens to the investors’ wallet he or she sent the cryptocurrencies from.

Now that the year is over, looking back at what happen with this so-called ICO craze, it is hardly surprising that many people – without even doing a proper due diligence – literally threw their Bitcoin and Ether gains at all these start-ups that have been doing an ICO: According to a study from Mangrove Capital, the average yield of all ICOs, including the unsuccessful ones, was no less than 1300 percent in 2017. Of course, only a few people will have picked only the right projects, but nevertheless, some have gotten pretty rich.

The concept of Initial Coin Offerings is based on the concept of Initial Public Offering (IPO). The latter is dong by a company, if it wants to go public. It seems quite intuitive to regard an ICO as the digital counterpart to the classic ICO. However, this is not entirely correct. Whoever buys a token through an ICO does not acquire company shares. Also, a share from and IPO grants dividends and voting rights in contrast to a token. In principle, both is also possible for the token – but in practice this is hardly ever the case. Most tokens serve as mere utility tokens. One exception is a Swiss example: Modum – a company founded in 2016, which manufactures sensors combined with the blockchain for temperature measurement in the supply of medicines and potentially other fields.

Rebels going global

The fact that this new form of financing companies has experienced such a meteoric rise may be due to the following reasons: With an ICO, you can address interested parties directly all over the world. There is no other way of raising so much capital so quickly. Through traditional capital markets collecting sums like the ones raised during ICOs is merely impossible. Legal requirements and legal regulations already make fundraising through private equity a very time-consuming hassle. In addition, venture capitalists are very selective and invest only where a meticulously elaborated and promising milestone plan has been set up. This is why the so far unregulated ICOs are a very warm welcome alternative to avoid the inflated transaction costs and collect funds without any major commitments. Increasingly regulators and private lawyers are observing this new field of financing with the aim of passing new laws and regulations in order to bring some professionalization to the space of ICOs, as they call it. This is rather ironic, since ICO have risen just because regulators and lawyers have heavily regulated the existent capital markets. They overlook that the advantage of an ICO lies precisely in the fact that financing through an ICO can be carried out without the absurdly high costs incurred through banks, lawyers, authorities and notaries.

Nothing is perfect, not even ICOs

Although several start-ups do an ICO because they can sort of act without having to comply with unnecessary rules and instructions, not everyone sees the ICO as a free pass. Modum, which has been mentioned above, has invested a great deal of time in implementing its ICO to comply with current rules. According to the founders of Modum, the law is fundamentally technology-neutral, which is why it does also apply to ICOs.

Ultimately, ICOs are still celebrated by many as a revolutionary act of self-liberation. Never before has the 16-year-old teenager been able to invest a little of his own money into a possibly promising company. However, as is always the case with revolutions, there are exaggerations, and some of those people involved are pushing a welcoming thing to excess. For this reason, it is often the long-time crypto enthusiasts that speak up against most of the ICO’s, because they think they are either junk or even fraud. The reputation of good ICO projects should therefore be maintained by means of self-regulation, is something they call for. So this is why the Crypto Valley in Zug wants to draw up a “Code of Conduct”. Because one thing is clear: ICO will hardly disappear by itself.


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