Tokenising Business – Taking the ICO route

In February 2018, Mumbai based Drivezy – A Peer to Peer car and bike rental platform raised $5 million in the first round of its Initial Coin Offering -ICO. The company used Rental Coins 1.0 as its private cryptocurrency token to raise money from investors and HNIs based out of Singapore and Japan. In the recent past,numerous Start-ups have successfully integrated blockchain technology into their business and has taken the ICO route to raise funds for their business.

An ICO is a novel method of fund raising for start-ups by issuing digital tokens. This issuing of digital coins is known as Tokenisation in the crypto world. A Token represents something “particular” in the business ecosystem. This could be a value, service, voting rights etc.Are crypto currency and tokens one and the same? The answer is No. A cryptocurrency has a value outside their indigenous environment. But tokens are based (derived from)on an existing smart contract platform like Ethereum, bitcoin cash Ripple etc.The SEC – USA recognizes two types of tokens. They include Security tokens(usually asset backed) and Utility tokens.

Security tokens are crypto tokens which fulfill the conditions like money investment in a common enterprise with the expectation of profit from the work of the promoter or third party. These Tokens are subject to the regulations of SEC as they derive value from the external assets. On the other hand, utility tokens are simple and they provide the users with a right to use a product or service. These tokens act as pylons. Have a look at the chart given below to get a quick understanding on the amount of money raised through Token sales in the last decade.

(Source: The Token Economy by Shermin Voshmgir)
Why are entrepreneurs attracted to ICO and how do they work?

Essentially an ICO gives start-ups an alternate method to raise money through crypto currency (Ethereum and Bitcoin)bypassing the norms of raising the fund through a venture capital or banks or other financial institutions. An ICO can also be understood as a marriage between Initial Public offering (IPO) and Crowd funding. The most captivating part of an ICO is the lack of red-tape, formality and cumbersome rules and regulations. Any company interested in raising funds through ICO need to submit a “whitepaper” to qualify. A whitepaper is a written document which precisely states the problem addressed by the project (start-up) and the method of solving it. Upon reading this if an investor is interested, he can invest in the project or stay away.

The developer of the project issues limited number of tokens for a predecided amount to gain funding for the projects. As demand for the token increases, so the supply of token diminishes and this can push the predetermined price of tokens. From the investors’ side buying token is a hassle-free process. You just have to send some crypto currency to the crowd sale address. In no time your e-wallet will be credited with the corresponding amount of tokens. For example, if the project is scripted on Ethereum platform then Ether crypto is used to buy tokens. There is a big advantage of using Ethereum platform for ICO’s and it has smart contract functionality. Smart contracts are contracts that get automatically executed upon certain conditions being met from interested parties.

The Good, The Bad and The Ugly

ICO’s provide a fresh lease of air for start-ups whose projects tread the road less travelled. Many projects may not see the light of the day because they are unconventional and raising money through an IPO is a complicated process. Here ICO comes for rescue. In one of the largest ever ICO’s Bancor raised $153 million in three hours under the Ethereum platform which is unimaginable in a ‘centralised’ world.

Does this mean that ICO’s are without blemishes? The answer is NO.

Statistics say that around 70% of the ICO projects proved to be a rip – off. ICO sales of 2017 shows that of the 700 token sales made, only 15 % of them got into public listing. 40 % received funding but failed deplorably. Some tokens in spite of their outstanding fund-raising efforts could not generate any benefit for the investors resulting in negative ROI for them.

Another obstacle is the participation of ‘Crypto Whales’ in the ICO participation. ‘Whales’ are people with significant financial clout who defeat the underlying purpose of crypto which is‘decentralisation’. For example, during the BAT ICO an astounding sum of $35 million was raised in 24 seconds. This was done by ‘Whales’ to grab tokens early cutting the queue by paying exorbitant transaction fees

In the recent past we see an increasing trend in raising funds through ICO’s, but has not been legalised in many parts of the world. Investors understand token as a digital asset than a financial asset and hence ‘crowd sale’ of these tokens are many times more alluring. But as most of the tokens took the failure route, investors became critical and regulatory compliance got stepped up. Many countries including India do not have a strong regulatory regime leaving the ICO’s in an uncertain space. Even though RBI has not declared ICO’s or Crypto currencies as illegal per se, it has issued advisories cautioning investors and users about the potential risks involved in it.

Despite all these uncertainties and controversies cryptos and tokens are here to stay. Shermin Voshmgir in her book ‘Token Economy’ states that in 2016, token sales raised around $600 million, in 2017 it went up to $7 billion. In 2015 the global crowdfunding volume was around $34 billion and its expected to grow by $100 billion in 2025. Token has become a popular fund raising and investment wagon. Tokenisation of real-world assets like stocks, bonds and currencies with proper regulatory frame work would step – up the security and bring in increased mobility of funds and create new business models.

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