Utility ICOs: The Risky Business of Premature Valuations

Innovation, Investing | September 19, 2018 By:

In just the first quarter of 2018, funding for initial coin offerings (ICOs) reached $6.3 billion, effectively surpassing the entirety of 2017 funding. Additionally, nearly 100 ICOs are launching each month in 2018.

Though it appears that public opinion is moving in favor of the underlying blockchain technology, corporate and financial institutions have long been reluctant to wade into tokenized offerings. While the numbers don’t lie, so-called utility ICOs, or those that provide user tokens or app coins for future access to a company’s products or services, still pose a number of risks.

First and foremost, local and international regulations abound and are extremely complex. Many token issuers hope to use ICO funds to build real companies, but they typically flout laws that are in any case murky at best in their handling of tokens. An ICO that seeks funding without proper compliance will likely run into issues later, as regulation begins to catch up to the crypto-world.

Building the necessary requirements in from the outset can save a company significant costs later on. Additionally, by taking this route many companies are losing out on some key advantages, including making it easier and less costly for entrepreneurs to raise capital and for well-established corporations to finance large, complex projects. Early compliance offers companies a leading advantage against other competitors who arrive late to the game.

On the investing side, utility tokens are not backed by tangible assets, making them incredibly risky for investors. Furthermore, the blockchain world is akin to the Wild West. Without regulation of the industry, consumers and investors take sole responsibility in assuming any and all risk should issues occur. And occur they do.

Wallet lockout is just one key issue that all cryptocurrencies face. Should a user forget their PIN or other required information, they are out of luck and face the likelihood of a lost investment. This behavior is incompatible with the expectations of shareholders or the legal requirements facing real companies. The need for critical password knowledge also stands in the way of property rights in general, whether that is the execution of a will, the enforcement of a court judgement, or simply the facilitation of custodial services. Under current ICO technologies, there is no way to transfer ownership rights if the password is not known, but that is simply inconsistent with investor expectations and the law when it comes to securities.

FULL VISIBILITY AN ISSUE

Furthermore, while the blockchain itself allows for greater transparency, there are a number of potential snags that ICOs can run into during their launch. Oftentimes, ICO investors may not be able to get information about the issuer on a fully diluted basis, that is with full visibility on all the tokens that have been given, promised, or otherwise encumbered.

Properly executed Securities Token Offerings (STOs) on the other hand, offer peace of mind to those companies and investors that seek new forms of capital and opportunity. Because securities tokens are actual financial instruments, investors’ tokens are backed by something tangible, such as the assets, profits, or revenue of a company. Their value is derived from an external, tradable asset, making them inherently more stable.

Recently announced Aspen Coins are one such tokenized security. Each token represents a single share of common stock in the St. Regis Aspen Resort and present a revolutionary new way to invest in real estate.

A new breed of STOs such as those powered by Token IQ’s patent pending technology can enable issuers to reissue tokens to shareholders should they forget critical information, such as a PIN, avoiding the catastrophe of a wallet lockout as well as providing critical capabilities such as Options, Vesting, and other well known mechanisms that are largely absent from the ICO world. The built-in compliance capabilities of a Token IQ powered STO allow investors and companies to bridge the gap between the new world of blockchain and tried and true world of securities. STOs promise to bring the power of this revolutionary technology to the securities industry to help companies from startups to the Fortune 500s and their investors.

And just how big is the securities token market? Currently, it’s expected to hit $10 trillion USD by 2025, making it by far larger than the utility token market. With so much opportunity it is clear that the securities token market will only continue to grow in scope and acceptance.