A strategic analysis of ICOs in H1 2018

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In 2018, it seems that we are in a constant bear state. However, Initial Coin Offerings (ICOs) are still gathering momentum and becoming a viable, workable and alternative source of crowdfunding.

According to a joint PwC and Crypto Valley Association report published in the June edition of Strategy&, in the first five months of 2018, ICO volume is already twice as much as it was during the entire year of 2017; a total of 537 ICOs, with a volume of USD $13.7 billion, have been closed successfully.

This is positive and reassuring news for investors. With countries around the world vying to become ICO-friendly hubs, new regulation in the USA, and with several large scale ICOs entering the Top 15, previous records from 2017 are being dwarfed. Telegram (USD 1.7 bn) and EOS (USD 4.1 bn), are just two examples of emerging ‘ICO Unicorns’.

Monthly ICO number and volume

Monthly ICO number and volume

So where is all this investment occurring?

ICO hubs are being established all over the world. The top players of USA, Switzerland and Singapore remain key global ICO hubs, however, over the past months, the UK and HK have gained significant ground. Not surprisingly, tax friendly jurisdictions such as the Cayman Island and British Virgin Islands are ranked among top ICO countries and other smaller countries such as Estonia, Lithuania, Israel, Liechtenstein, Gibraltar and Malta are also keen to promote themselves as investment centres for ICOs.

But how is it all being regulated?

This is where it gets interesting. According to the PwC report, ICOs are inconsistently regulated across the world. Different regions, different countries and even different states, all have differing ways of imposing regulation on this market. However, there are three models of regulation emerging — these being the US (securities driven), Europe (balanced) and Asia (binary).

For example, each of the US states have their own regulations and the Securities & Exchange Commission (SEC) retains jurisdiction over ICOs and definition of security tokens. Meanwhile, in Switzerland, the Swiss Financial Market Supervisory Authority (FINMA) reviews new ICOs on a case-by-case basis while the Monetary Authority of Singapore (MAS) issues guidelines but does not regulate virtual currencies. This may reflect the quality of projects arising from these regions, and the speed of launch to market due to the level of regulation enforced.

Global ICO hubs

Global ICO hubs

Where does this leave traditional investment?

ICOs are disrupting the traditional venture capital funding model. As a prospective investment opportunity, ICOs are becoming an increasingly attractive alternative to traditional debt/capital-funding by venture capital (VC) or private equity firms and banks. This is because of their ability to offer a new hybrid model of funding to get the best of both worlds. By combining ‘smart money’ with crypto and tech-savvy community support, this enables founders to get VC validation of the seriousness of their business, plus the crowd validation of the idea and market potential. This model enables greater flexibility and the opportunity for founders to innovate, which is key to success.

New archetypes of fundraising

New archetypes of fundraising

What next for 2018?

ICOs are maturing and developing best practice in their funding process, investor relations, and legal and business set ups. This is good news for potential investors as the industry continues to move into mainstream adoption. Structured fundraising with investment caps and communication throughout the token sale period increases transparency as does increased focus on increasing communities of interest and ecosystems, not just tech development. More and more, traditional businesses and startups are looking to use blockchain technology and launch ICOs using the hybrid models as valid funding alternatives. After ICOs went through a hype-cycle in 2017, they are evolving and becoming more established in 2018. The increasing trend of projects issuing Security Token Offerings (STOs) instead of ICOs, also reflect the changing of regulation and the maturing of the market.

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