As my title alludes this piece will be, in some way, a rebuttal to the recent blog of Mr Michael Flaxman, titled, ‘ICOs are Cancer’ [https://medium.com/@michaelflaxman/icos-are-cancer-c404594f181b]. 
I believe we are all products or our environment. What I see in Michael’s commentary is the views of a traditional VC insider, a member of the community which has largely been disrupted by the democratising power of the mechanism of an Initial Coin Offering (ICO). My experience of VC’s is somewhat different to Michaels, having sort VC money over a period of a number of years from 2007 – 2010 in respect of my own Software as a Service, start-up.
I am not espousing the purity or maturity of the ICO process. I see the ICO process being fluid, maturing over the last 18 months, and continuing to mature. I base this comment on the experience of a number of ICO’s I have been personally fortunate enough to support. What I espouse is the disruption event itself, the mechanism of the ICO seeing traditional industry gatekeepers, the VC industry in this case, being dislodged, removed from its traditional seat of power. This disruption sees a democratisation of the risk and reward and a fairer distribution of control and power of the running of the start-up residing with the founders and entrepreneurs, over the VC funders.
Michael, in his well-organised blog describes: (i) what he believes are the problems ICO’s are trying to solve and (ii) why he believes the mechanism of the ICO’s are creating far more problems than they are mitigating. I will follow Michael’s lead and comment where I can assist the reader with an alternative viewpoint.
Understanding the new ICO business model
An ICO, colloquially known as, crowdsale or token sale, is an event where the ICO participant releases its own digital currency in exchange for another or other cryptocurrencies, like BitCoin or Ethereum, which have liquid tradeable value.
An ICO can support a myriad of different examples and execution of 'speciated' BlockChain technology. The ICO Company use a digital utility token to engage in the commerce of its platform and marketplace. The platform, by architecture, will enable and embolden micro transactions, a class of transactions not being supported by traditional fiat currencies today. This is an enabling feature of platform design and conducive to aggregating other industry participants to engage in enlarged and improved industry services within the platform service offer.
The resulting digital token, and the value of same, will therefore be a measure of the success of the entire platform and ecosystem business. Furthermore, there is further value and economies of scale to be realised by replacing heavily single siloed proprietary process and practices with the immutability of open source cryptosystems and a distributed digital ledger. ICO Companies not supporting a platform offering of aggregated service ecosystem may find it hard to argue the necessity of an ICO, other than to raise money, a useful endeavour by itself.
The maturing face of ICO’s
As ICO requirements grow, so does the imagination of founders and entrepreneurs on how to best support the engaged community and the ICO participant. In addition, the founder/s must also consider the growing interest of regulators, including the SEC, and the growing importance, relevance and oversight this group will have in future ICO events. It is therefore important the new aspirational ICO behaves more like a traditional company in respect of understanding of its ecosystem, competitive environment and what information it prepares and makes public during the course of the ICO.
Michaels #1 Government Regulation
Michael speaks of ‘accredited investor’ in reference, I believe, to Rule 506 of Regulation D of the US Securities and Exchange Commission and Section 4(a)(2) of the Securities Act. Use of this exemption section is open to any company fulfilling the provisions of the Act and Regulations. This is US Law, applying only to US residents and to only those companies intent on engaging with US citizens in respect of the perspective ICO. Notably, and absent from Michaels writing, is all U.S residents are allowed to purchase the token, after the completion of the ICO event, and when the token is listed on a supporting cryptocurrency exchange. Needless to say, this is regulation that pre-existed the ICO phenomenon. Company’s following the ICO path, and desirous of making an offer to US residents, are simply taking advantage of current US law and best legal advice available, to reach their desired audience.
The question of whether a digital token is a ‘security’ or an ‘infrastructure utility token’ is a complicated one and a question of objective merit, worthy of consideration often on a case by case basis, at least until a treatment, formula or definition has been defined, by ruling and subsequent case law. Questions of relevance and fit in respect of, ‘what is a security’ and what is a ‘utility token’ will be questions for determination by others. The underlying ethos of the BlockChain community is government, regulation, surveillance, oversight, action and punitive enforcement is neither needed nor wanted.
I recognise to be an accredited Investor means you are wealthy as the tests are on net wealth and income and therefore, small investors would be excluded of US ICO raises. However, this is a perpetuation of existing treatment (Law) and not of the making by ICO’s. To suggest it is the ICO mechanism that has caused further isolation of the “don’t-have’s” in favour of the “have’s” is both a nonsense and completely unfair.
What the article fails to articulate is the ICO and respective digital currency define very different value propositions and outcomes, supporting a myriad of different examples and execution of 'speciated' BlockChain technology. It is not an accurate assessment of the digital currency phenomenon to look at the digital currency by itself. This is not where the new digital value originates or resides. The value of the new digital currency is, or should be, a holistic measure of how disruptive the BlockChain and supporting processes can be, in respect to the cost savings and value economics of what they are disrupting, and in most cases, completely revolutionising.
Michael’s #4 Platform Profit sharing (aka “Utility Tokens”)
Michael says, “Most companies are not actually platforms with powerful network effects, so the value added by the early users doesn’t justify granting them ownership in the company.”
A utility token is not akin to an ordinary share. There is no ownership assigned in the said Company with the possession and control of that Company’s utility tokens. Having done a start-up in 2006, before the mechanism of ICO was available, I am aware of the cost and time constraints of building a global facing business. The ICO and issuance of utility tokens, via a Bounty and Reward Program, sees the perennial costs of translation, marketing, advertising, promotion and sometimes testing (etc.) pushed out to Company’s supporting community. Payment for this critical, time consuming and expensive work is ultimately made in utility tokens, meaning a huge saving in terms of cash flow and seeing the platform operational, hopefully to a degree, before the issuance event. This is a clever way of spreading the start-up risk, away from the ICO Company and spreading it amongst the participating Bounty program participates, community members passionate about the project. Further operating an ICO Bounty program, in their various forms, and assigning the supervision of such to a participating community member, where appropriate, enables the ICO company to create time, (something Einstein could never achieve), by leverage the most precious resource the team has available to them, ‘themselves!’
Michael says, “The whole point of money is that it solves the double-coincidence of wants problem that makes barter massively ineffective. Requiring customers purchase your tokens in order to use your services is a huge barrier to mainstream adoption.”
A well-designed “Platform as a Service” (SaaS) architecture will support an internal exchange seeing the amalgamation of Fiat and digital currencies at the service border. This functionality of open e-commerce is already supported by a number of successful ICO Platform as a Service companies I am personally aware of. The successful execution of a true platform as a service architecture, seeing inputs and outputs from all ecosystem participants as well as community members, in their many and various forms, promises a new economy of scale simply not possible with a traditional pipeline business model.
Michael says, “It confuses where the value is. Are customers using your product because they like it (and thus are willing to pay) or because they hope that everyone else will use it and their tokens will become valuable? The former is the foundation for a lasting enterprise, and the latter is how you create a house of cards. Tokens can encourage founders to go after the wrong customers."
ICO participants looking to support any of the new digital coin offerings should understand the unique value proposition the digital coin and supporting platform brings the current ecosystem, including its competitive environment. In respect of an ICO, the participant is purchasing a utility token. These tokens will be used within the platform and ecosystem. The value of the underlying utility token will be defined by value of the platform and ecosystem it supports. Potential ICO participants should also understand the underlying value or the appropriateness of price of the offering. I believe this level of due diligence is now being done by the most informed. I believe participants in the ICO process understand the value of the ‘status quo’ and the potential value, often via a matrix of combined cost savings, which a digital ledger can provide. Understanding the technology is never enough in isolation however, in the case of the BlockChain technology, much has already been written about the disruptive ability and value this diametrically apposing technology can bring.
My comments in respects to Michael’s “The Solution” paragraphs are as follows:
#1 Lack of Basic Investor Protections
Those wanting to support an ICO should do their own due diligence before undertaking any commitment. For beginners and those inclined to support, perhaps a cautionary ‘toe in the water’ via the Bounty programme is a good start? Not all ICO’s are created equal so read the whitepaper and understand the technology. Consideration of the make-up of the Team, both Company staff and Advisors, is critical. Also understanding the product offering, development roadmap, and customer acquisition time frame, as a forecast can be helpful, if released. You are not a shareholder and do not possess shareholder rights. You do have ‘skin in the game’ however so support your company and become an active member of the community. At the end of the day, a sensible strategy may be allocating a small percentage amount, you can afford to lose, to your ICO of fancy. If you have a portfolio, it may well reduce the standard deviation of return, therefore improving your portfolio risk adjusted return. After all, these assets may not be correlated to the market. Support of an ICO digital coin is not an investment – see #3 below.
#2 Misaligned Company Incentives
Careful Capital management and planning for success and growth is essential. A large ICO raise should not mean the Management Team are all driving Porsche motor vehicles. I believe, an agreed change to the Share Holder Agreement will allow further Capital to be raised in the event of a further Capital need, if allowed in the Company Articles of Association. Management Team and ICO participations should share a single purpose in respect to seeing growing platform user cases and use and increased measures of token velocity inside the platform and ecosystem.
#3 Not Actually an Investment
Support of an ICO is NOT an investment, but rather early support of the underlying technology, vision and mission of the management team. Participation in the ICO comes without any protections, as described by Michael in this paragraph.
#4 Massively Complex Regulations and Other Distractions
The undertaking of an ICO is huge. It requires a ‘start-up’ mentality by a committed team ready to work well beyond the normal 9 – 5 as prescribed by society norms. Although the issues are complex many 3rd party Software as a Service (SaaS) providers have arisen in support of this new industry. Support for authentication, KYC verification, wallet management and smart contract audit are just some of the services available to the aspirational ICO to achieve the best possible result with a minimal headcount, by normal organisational standards. Support in respect of these services are becoming wider with an increase of service scope. I see no reason for change in the pattern of continued growth.
#5 Fundamentally Incompatible with the Legal System
Codified law is continuously being amended, new parts added and old irrelevant sections being removed. If an amendment or two isn’t enough law makers can make new legislation, by virtue of a proposal for new legislation, being born and coming into power by majority vote and by Royal Assent (Australia). This is happening regularly within Australia, both federally and at a State Government level. A transaction, when entered on the BlockChain cannot be “rolled back.” When written into the BlockChain it is there forever, in clear view without attempt at subterfuge or concealment, unless this feature is part of the BlockChain specs itself. Courts will make rulings in respect of transactions, and corrections of same, however these corrections will be executed within the mechanism of the proper use of the BlockChain itself. The execution of any court order, in respect of a BlockChain transaction, will be treated no differently to what has come before it meaning the court is looking for a treatment correction and a noting of the record.
#6 Private Key Management is Really Hard
The management of private keys is a task in organisation rather than IT sophistication. In respect of software wallets, there is no greater challenge to managing a private key than is involved in management of your favourite software login’s and passwords. The consequences for loss however is far greater. Ensuring the correct wallet software for the appropriate platform and minted token is probably the greatest challenge facing new members to this domain. Many help tutorials in respect of this are available online.
Loss of private keys does mean loss of access to the BlockChain and the value assigned against that private key. This loss is permanent unless a seed phrase is supplied and available to you to reconfigure the private key. Great caution and care should be practiced with the management of your Private Keys. Custodial services may become more common in the future allowing Custodial Agents / Banks / Brokers to hold private keys on behalf of their customers.
What You’re Involved in Reflects on Your Character
Michael says, “Starting a company has never been cheaper/easier, and raising capital via traditional means these days is quite easy for talented entrepreneurs. If you’re thinking of doing an ICO, you should take a hard look in the mirror and ask yourself why that makes the most sense for your stakeholders.”
My experience within the VC space, prior to the advent of ICO’s, is when a VC does agree to fund, the VC fund will ameliorate their own risk at a heavy cost to the founders. I recently read the VC industry had seen a loss of 75% to their traditional revenue stream via the phenomenon of crowd funding. Many of the same VC’s who initially vilified the ICO process are now actively engaging in the process. The convergence of sensible due diligence coupled with the great experience a VC team brings to the table, is a great outcome for any ICO start-up. Seeing better initial reporting and sensible forecasting and business models being added to the ICO process can only be a good thing in respect to potential participants being better informed of both risk, strategy, market and technological relevance.
A successful ICO can bring the start-up a load of funding for future platform/software development as well as much development, translation, promotion testing and other more artistic endeavour, in favour of the start-up, at a rate much faster, cheaper and with greater dimensional difference, than by traditional mechanisms. All this with no loss or dilution of ownership and decision making power. Stakeholders become community members and these members are emboldened and charged with the success of the democratised endeavour. Not sure what character has to do with that?
Conclusion
In the past 18 months I have had the benefit, experience, privilege and insight into supporting a number of ICO‘s, in their support of greater ambitions of disruption and business evolution. In this short time frame I have witnessed a maturation of the ICO process, a steadfast approach to honest, transparent and timely reporting of news of community membership interest. I have seen the respective Management Teams looks to build meaningful and long-term relationship with the community that support them, not only for the period of the ICO, but for the longer journey of building a network of change, participation and inclusion. The importance of the supporting and social community is critical in the business model and the model rewards this with its inherent democratisation of the business and ecosystem where all who participate are rewarded. This is a structure and model atheist of the better-known platforms of Facebook, Apple et al.
There is no doubt many, and perhaps most, of the new digital currencies, grown of an ICO may eventually fail. This failure will occur because the economic arguments of change, what BlockChain and other technologies offers and brings to the platform and ecosystem under change, will not be overwhelming enough for the change to take place. It will be the holistic ‘economies of change’ brought about by a committed Team, that will determine the value of any respective digital currency. I am emboldened as I see the highly skilled VC sector join the malaise offering great insight into what it takes to build a success start-up and platform as a service offering.
Finally, I say to Michael, thank you for taking the time to share your views, but not all ICO’s are the same. There are some awesome examples of entrepreneurship where the principles of decentralisation, democratisation and transparency will build better, fairer and cheaper platforms and ecosystem. I invite him to learn, communicate and participate with the community, Bounty Programme and if appropriate, the ICO itself; not for monetary gain but because he supports what the project promises to deliver. I believe he will discover a new model of community support, serving both the ICO aspirational and those participating in the process.