If you’ve come across “Area 51 raid” or saw the phrase trending all over social media this past weekend, you might be wondering what’s…
China’s announcement today that it has banned all initial coin offerings (ICOs) might be “unexpected”, says Bitcoin Foundation executive director Llew Claasen but is only a temporary setback for startups looking to raise capital through ICOs he adds.
He said the decision by Chinese authorities to ban ICOs rather than to regulate them as the US is moving to do, is simply another way to “deal with it” and that going forward regulators are likely to gain a clearer understanding on what can and cannot be done.
He added however that it would be “very unfortunate” for startups in need of early-stage venture capital (VC) finance if regulators across the world shut down all ICOs.
Claasen admitted that while there are people that are “darn right scamming” and those that are listing utility tokens as if they were securities, regulators should not place an outright ban on ICOs.
‘It would be “very unfortunate” for startups in need of early-stage venture capital (VC) finance if regulators across the world shut down all ICOs’
He described utility tokens as those where users can become part of a network by buying tokens but where they don’t necessarily profit from the tokens themselves.
The test, he added, on whether a token can be used as a form of security or just as a utility token, emerged out of a 1946 court case in the US which has come to be known as the “Howey Test“, he said.
Where there is a clear expectation that those participating in the ICO will gain a share of the profits and be able to have a say in the governance of the company, the ICO can be described as essentially an initial public offering (IPO), he added.
However, some utility tokens offer users the chance of a share in royalties, which Claasen pointed out should not make them necessarily an IPO.
“If it’s convertible into currency, it doesn’t imply that it’s (necessarily) a currency. It’s just added liquidity,” he said.
Yet Claasen said because ICOs are held on the internet where anyone anywhere in the world has access to them, it is difficult to estimate how many South Africans are involved.
‘FSB has many challenges’
While he added that there are currently very few ICOs being held locally, he estimated that an average of 15 to 20 are held globally each day. However he doesn’t believe the Financial Services Board (FSB) has done much to issue any clarifications around holding ICOs locally.
“I think the FSB has many challenges to understanding the VC and startup space. I think they have resource challenges,” he said, adding that it is “very difficult to engage” with the authority.
He pointed out that the recent promulgation of South Africa’s so-called Twin Peaks financial regulation has only added to the FSB’s challenges.
However, he said the foundation is engaging with the country’s Reserve Bank and the Financial Intelligence Centre (FIC). “So far the approach taken is ‘let’s see where this goes and when there’s a point where we can come in’,” he added.
He said because it uses a decentralised blockchain, there is no way to regulate bitcoin. The only way to regulate bitcoin and other cryptocurrencies is at the point where users themselves trade and convert coins. Here, he said, local exchanges are obligated to report on each transaction made in tokens and their value in rand as well as those transactions where tokens have been sold for rand.
‘Bitcoin ATMs will become reality’
Some countries have ATMs which allow users to withdraw the value of bitcoins in local currency and Claasen said South Africa has perhaps two initial bitcoin ATMs – in Johannesburg and Cape Town – but that the network of such ATMs has not grown because of high transaction fees.
Currently the speed at which bitcoin transactions are made is constrained in that the network can only handle about six to eight transaction a second. However an imminent update in the bitcoin exchange which will allow an infinite amount of transactions to take place per second. This said Claasen will likely bring down the cost of transacting with bitcoin at ATMs, which could see the adoption of more such ATMS in South Africa.
‘Most tokens will be useless’
But with the ballooning price of bitcoin (having exploded through the $5000 mark this weekend) are regulators not right to be concerned then about ICOs? Particularly if more ordinary investors pile in on what looks like an investment fad?
Claasen says in the short-term bitcoin has proven to be prone to speculation. Investors, he reckons, should only take part in ICOs if they can afford to lose whatever money they put into bitcoin.
Rather than regulate ICOs, Claasen believes what’s needed is for the market to better educate investors. “Don’t just think that because it’s an ICO that it’s a good investment.”
Claasen – through VC company Newtown Partners (which he runs with entrepreneur Vinny Lingham) –has run two ICOs this year — including one in June for Lingham’s company Civic. The two are working on “a couple” more ICOs but Lingham says he can’t talk about them as yet.
He reckons ICO investments will reflect what can and can’t go wrong in any startup. Should investors then be right to curb their overblown optimism on ICOs?
Say Claasen: “Most of these token will be useless in the long-term, but that’s just a reflection of the fact that many startups fail”.