Changes in the Initial Coin Offering Landscape 8 months ago

Changes in the ICO Landscape

The cryptocurrency landscape has shifted dramatically over the past couple of years. Initial Coin Offerings (ICO’s) have become the epitome of the potential modern technology and the internet have to change our lives. A couple years ago, no-one would have believed that a start-up in a new, obscure asset class could raise millions of dollars in funding in only minutes. But today, that’s the reality of what’s possible in the ICO market.

Over the years, investment funding in this arena has grown from only a few million dollars in 2013 to $90 million in 2016, to several billion dollars in 2018. This explosive increase in funding has not only seen a dramatic increase in promising new crypto-projects but also has had some profound changes to the ICO landscape as a whole. To answer the question of how things have gotten to where they are today and where they will go in the future, it helps to go back and look at how ICO’s first came onto the scene.


A Brief History

Crowdfunding has existed for some time as a way of funding. In the 1700’s, Jonathan Swift founded Irish Loan Funds as a way to lend money to poor tradesmen who couldn’t get traditional funding. Fast forward to 2009 and over $530 million has been raised through platforms such as Kickstarter. Other crowdfunding platforms such as GoFundMe would emerge later, generating billions of dollars over the next several years. However, all of this pales in comparison to the success of ICO crowdfunding which all began with J.R. Willett, who launched the first ICO called Mastercoin in 2013. Publishing a White Paper titled The Second Bitcoin White Paper, this revolutionary idea at the time raised over $5 million in funding.

Quick the follow, Ethereum burst onto the scene in 2014 where it raised over $16 million dollars in the form of Bitcoin’s, which was the largest ICO at the time. While Ethereum was a technological leap at the time, few people in the tech space were even aware of the project during the ICO. Despite the successful crowdfunding drive, ICO’s still remained a relatively obscure affair where everyone who wanted to participate in a project could. However, it was only through new blockchain developments such as smart contracts that made it easier for alternative tokens to offer tangible solutions to the market.

Fast forward to 2017 where the crypto market took off. With hundreds of tokens utilizing Ethereum-supported smart contracts as the cornerstone for their projects, the price for Ether jumped from $10 to almost $400 in just under six months. With little regulation at the time (especially in early 2017) ICO’s were free to conduct themselves however they saw fit.

What did emerge, however, was a competition amongst the numerable investors to see their smart contracts get priority on a then congested Ethereum platform. Labeled as the “gas war,” investors rushing to acquire tokens in promising ICO’s competed with each other to make sure their transactions get recorded first – which required quantities Ethereum’s native token, Ether. Since miners would first process transactions that offered them the highest fees, many investors chose to pay massive transaction fees to ensure they get priority treatment in getting the token sale. This created a situation that divided contributors into those that can afford these hefty “gas” fees and the smaller investors who often couldn’t get in on the ICO.


Regulatory Evolution

By the trailing end of 2017, funding through ICO’s had surpassed early-stage venture capital funding. However, this was the beginning of the end of what was previously a situation akin to a wild-west gold rush. The SEC issued a statement in July that declared the DAO ICO a securities offering and that it should fall under securities regulations. In response, ICO’s started demanding that all investors go through mandatory KYC or “know your customer” procedures. At the same time, blockchain projects went out of their way to provide evidence that their tokens did not pass the Howey Test and were not securities.

Most, however, found themselves unable to skirt the regulatory demands placed on them, and many projects would face subsequent legal ramifications for misidentifying themselves. We would also come to see a broad selection of different token types come onto the scene. In addition to the regular securities token that remains popular, alternatives such as utility and reward tokens started to appear in the ICO markets.

Coming around to 2018 with the increasing popularity of the ICO market, good ICO’s were attracting large amounts of private investors, syndicates, and traditional venture capital attention. These early bird investors would usually invest a large amount into the ICO and get a bonus for doing so, but with so much early interest in many of the most promising ICO’s, funding targets often got reached prior to the crowd sale. This leaves little left for small investors who could be left out of the process altogether.

ICO Funding By Each Year

The Current Situation

While 2018 has already broken funding records from 2017 in its first two quarters alone, things have changed dramatically since a couple of years ago. Regulations have become far tighter, with most countries having some form of anti-money laundering protocols and classification rules for ICO’s to abide by. Some countries, such as China, have flat out banned ICO’s in a move that caused some panic among the blockchain community.

But the most telling trend coming to the ICO landscape is the prospect of a maturing marketplace that will slow down and stabilize. The idea is that this stage will come about once traditional financial institutions take the plunge and dive into the blockchain crowdfunding world both because there is money to be made but also to tokenize their existing business models. Just as investment banks offer services to companies looking to go public with an IPO, it’s only inevitable that large institutions will pivot and cater to the ICO market in a bid to outdo the many boutique ICO advisory companies that have sprung up.

The “Big Four” consulting firms of EY, PwC, KPMG, and Deloitte have already begun making major inroads into the market in a bid to establish a foothold. Deloitte, for example, played a large role in the Playkey ICO which raised $10.5 million, with the consulting company providing additional legal advice to the start-up’s team prior. Other firms, such as PwC, have restricted their ICO work to Asia and Europe for the time being. Both EY and KPMG have been active in the market for a while now, with the later jumping into the fray since mid-2017.

While smaller ICO consulting firms might worry about the prospect of these big names entering their previously unchallenged marketplace, it’s not necessarily a bearish situation for these companies. Specialized, nimble consultancy firms have a head start in the market and already have made a name for themselves. In contrast, the “Big Four” still are proceeding with caution as the prospect of a malpractice suit could be nightmarish for more mainstream companies. They also need to avoid any liability that might arise from potentially fraudulent campaigns. All these considerations, coupled with the fact that these major companies will still need to balance their other activities, means that specialty firms dedicated to the ICO space still will retain an edge in the years to come.


Final Thoughts

The major changes that the ICO landscape has undergone over the last few years besides the explosion in popularity include factors such as regulatory changes, more funding from traditional sources, as well as an increasing variety in the type and function of these crypto projects. Sooner or later, this explosive growth will level out as the market matures as traditional financial institutions become comfortable with ICO’s. Until we get to that stage, however, blockchain projects, ICO advisory firms, potential investors, and anyone in-between can look forward to a period of escalating growth and exploding diversity in crypto-projects.


Also published on Medium.