I recently attended a panel discussion in San Francisco surrounding the future of ICOs and token-based fundraising in 2019. During this event, many of the points covered below were discussed–here’s a recording of the event by CryptoMondays for those interested.
The panel (and I) were all of the same opinion: that ICOs have left us, but we’re the ones that have now ‘gone to a better place’.
As early as the end of 2017, many so-called ‘crypto experts’ were slating 2018 to be the year that ICOs went belly-up, while others were sure they were the fundraising method of the future. The former were right, with many different factors ranging from legal issues to tokenomic mechanism design all working together to bring the disruptive new ‘kickstarter on steroids’ down.
Part 1 – So, How Did ICOs Die? (Or What Killed Them?)
Bad Token Design
In the immortal (and paraphrased) words of Dr. Zoidberg: “Your [token] is bad and you should feel bad”.
This was true in a lot of cases, whether by ignorance or intentional design. Projects that incorporated an unnecessary token for the sole purpose of ICO-ing often found themselves trying to fit a square through a circle – a token didn’t add any real value to the network, so when the network grew, the token didn’t. Once users realised that their token was worth a grand total of nothing squared, both usage and token-price would sharply decline.
Others took the intentionally bad route, offering MLM-type kickbacks or revenue shares as an incentive to purchase tokens with no inherent value. Sometimes these were accompanied by fake press releases, doctored images and false partnership promises to lure the more excitable and naive investors in.
It wasn’t all tacked-on tokens or empty promises, however. Some projects had very original and innovative tokenomic ideas, but whose complex mechanisms and models held an unseen loophole or flaw and thus didn’t have the economic robustness to survive once something unexpected occurred. Prime examples of this are FCoin’s Trans-Fee mining or the 0x protocol simply being forked to circumnavigate ZRX fees. The free market is a harsh and unforgiving mistress – if an avenue for exploitation exists, someone will find it.
The bad token design wasn’t the only factor, however...
“Accredited Investors Only”
This was a phrase that was often seen on an ICO’s private, pre- or main sale heading into 2018. So-called ‘investment’ (the purchase of tokens) was only open to individuals who had a total net worth of more than $XX or an income greater than $YY.
The ICO originally had two goals:
- Raise funds
- Distribute the token out to as many users as possible, thus promoting usage
Ethereum conducted one of the first ICOs and successfully filled both criteria when it sold ETH to a hoard of excited cryptocurrency geeks. Towards the end of 2017 and into 2018, vast swathes of (or even all), tokens had begun to be reserved only for high-value individuals and funds. Accredited investors 99% of the time have no incentive to actually use these tokens for the purpose they were designed, and would instead either hold their bags or flip the tokens for profit as soon as the ICO ended.
The Catch 22:
A whopping 84% of the total tokens sold in 2018 were to private investors. Because ICO goal number 2 was no longer being filled, network-usage tokens didn’t see the usage they needed to generate value, which in turn resulted in accredited investors unhappy with the price of their newly bought tokens and selling them off. This drove the price even further into the ground which resulted in everyone losing faith and becoming more and more toxic. Trying to run a startup with a 10,000 strong telegram group full of cryptokiddies with crushed 10x dreams and broken moon-rockets isn’t an easy task.
Of course, this wouldn’t have happened without the introduction of...
ICOs, meet Regulation. Regulation, meet a Regulatory Nightmare.
Enter November 2017. Munchee, a “Yelp meets Instagram” review platform is on cloud 9 after raising $15 million pre-selling the MUN token in an ICO.
Unfortunately, the cloud they were on had a blood-red lining, created when they promised investors that the MUN token would rise in value as their user-base grew. They were also planning to burn MUN tokens to reduce the circulating supply and further increase the value.
The SEC decided that these statements clearly defined the MUN ‘utility’ token as a security token by way of the Howey Test, and issued one of the first cease and desists to Munchee Inc, resulting in all $15 million of the raised funds returned to investors.
This wasn’t an isolated case, and so began the mad scramble by ICOs worldwide to avoid the SEC’s notice. Nobody was really sure how best to do this despite the release of a statement by SEC Chairman Jay Clayton in December 2017, so they used tactics such as:
– Only selling to accredited investors
– Implementing stricter KYC and AML rules
– Not promising profits (often just heavily implying them)
– Delaying their ICO (to wait for further clarification)
– Attempting to predict and preempt future regulation.
These shutdowns scared many of the legitimate businesses wanting to ICO, who quickly realised that the opaque regulatory environment was fraught with landmines. Even those that made every effort to fall within the guidelines could retroactively be punished based on future rulings.
As clearer regulations surrounding ICOs were slowly introduced, the dangers of the ICO became more and more apparent. Many gave up their dream of a quick-buck ICOing in favour of other methods.
So what are they?
Keep your eyes peeled for the second part of this series, "How To Raise Into 2019".
Disagree that ICOs are dead, or have something more to add that I’ve missed?
Get in touch with me at firstname.lastname@example.org—I’m always up for a chat, especially about the future of cryptocurrencies.