Startups: The wild world of ‘coin offerings’
“You know a market frenzy has turned surreal when Paris Hilton joins in,” said Jacky Wong in The Wall Street Journal. The hotel heiress recently followed billionaire Mark Cuban and boxer Floyd Mayweather in hyping a new finance fad called initial coin offerings (ICOs), which is a way to fund startups using the technology behind bitcoin. Instead of buying stock in a company, “investors walk away with virtual coins.” Depending on the offering, the digital coins can be used to buy the company’s future products or services, or will entitle the owner to royalties down the road. Investors can also buy or sell the coins on exchanges. The ICO market has boomed in recent months, with sales reaching nearly $2 billion this year, up from $256 million last year. But skeptical governments are increasingly concerned about swindlers preying on naïve investors. Just hours after Hilton tweeted that she’d be participating in an upcoming ICO, “Chinese regulators put a damper on the fun,” banning the offerings outright.
“Don’t feel bad if you’re still wondering, ‘What the hell is an ICO?’” said Mike Orcutt in TechnologyReview.com. These token sales are a little like a crowdfunding campaign, except they use blockchains to verify transactions. Blockchains are encrypted ledgers powered by a decentralized network of computers all over the world, whose operators, known as miners, receive bitcoin or other cryptocurrencies as payment in exchange for their work. The hope among cryptocurrency fans is that ICOs will allow promising companies and technologies to avoid the laborious process of attracting real-world venture capital, said The Economist, and that these digitally funded startups “could one day disrupt the tech giants.” Filecoin, which recently raised $250 million via an ICO, would allow miners to earn tokens for providing storage space or retrieving data for users—thus making a run at Dropbox or Amazon. “ICOs may indeed be a bubble, but perhaps a mostly healthy one, generating much innovation.”
The problem is that the market is basically unregulated, said Rhett Jones in Gizmodo.com. With an initial public offering (IPO), you might be making a bad investment, “but you can trust that a certain number of precautionary checkboxes have been marked,” thanks to strict rules. But with ICOs, pretty much anything goes. Plenty of ICOs are “downright predatory,” said Elaine Ou in Bloomberg.com. While some tokens enjoy astronomical gains, about 60 percent wind up dead or dormant. “Curbing token sales, though, won’t be easy.” The blockchain’s decentralized nature makes the market hard to manage or monitor, because there is no single point of control. “How can any government control a phenomenon that transcends national borders and rules?” We’re about to find out.