Just as Chinese traders needed direction, ICOs now need an Emperor Qin to take the reins, Antonio De Lorenzo writes in an exclusive essay for finews.asia.
ICOs have the potential to be impressive capital raising mechanisms, with over $3 billion raised thus far. The ICO blockchain technology has a remarkable application in promoting transparency and better governance. But just as the horse & cart was a superb innovation, it was the imposition of standards that made it ubiquitous and user-friendly.
Here, Asia led the way. The first Emperor Qin of China ordered that the axles on carts be standardized. Having a uniform width meant carts could travel all over China. Moreover, it made all the carts efficient and the roads safe. Just as Chinese traders needed direction, ICOs now need an Emperor Qin to take the reins.
Shutting down Legitimate Innovation
A collection of countries have issued statements about ICOs. These statements have two things in common. Firstly, they talk about the risks of crypto currency, with some jurisdictions disallowing them. Secondly, the deemed circumvention of securities laws, by the use of not-for-profit foundations in ICO constructs, has not sat well with regulators. Using variants of this construct, for a short period of time, a few ICOs were able to float «utility tokens» that were not technically considered securities.
This must have caused a tremendous amount of frustration and pressure on regulators. On one hand, such constructs probably should be disallowed. In several cases, it was clearly to avoid treating tokens as securities. On the other hand, if you condemn constructs like this, you potentially shut down legitimate innovation. This is a very confusing and difficult space - especially for the governors of our financial industry who are to uphold a fair and safe system.
Who is Right?
Measuring intentions is not easy, unless very clearly stated, and clarity is where the regulators headed. They wanted transparency on what was being securitized or tokenized. They warned that if the sale of tokens could be deemed securities, appropriate licenses would be required.
Regulators also stated that crypto currencies were inherently very risky, and their use should be seriously considered. China outright banned their use. The potential economic discord caused by ICOs and crypto currencies was perhaps too much for the governors to bear. Who is right is still a question to be answered.
Comfortable With Blockchain for Now
What has become easy to see is that blockchain technology has had yet another spat with lawmakers and the market. There has been no tarnish on its brilliant luster to date. Whether bitcoin or ether live is less in the minds of innovators. What is more present is the notion that there is another tool. One that allows for provenance and authenticity to be dealt with technologically, safely and accurately.
The world is increasingly comfortable with digital signatures and digital documents. As comfort grows, blockchain will be there to carry documents and authenticate their provenance. This is a potential game changer for investment markets and the newest, shiniest tool in the techno-toolbox.
Evolutions in the Capital Market
So, how can ICOs be a good thing for capital markets? For a security to be transferred in real life, lots of things need to happen.
Firstly, a sale and purchase. Behind that, money is pledged and securities are reserved. Cash is transmitted and received. Brokers ensure all of this happens smoothly, along with custodian banks, market makers and underwriters. The title of securities is transferred and the central securities depository records that a transaction is final.
With ICO technology, all of this is possible in a few clicks. With automated processes, errors are reduced. Even the finality of transaction settlement can occur automatically without much human intervention.
As with cart axles, the ICO community need an Emperor Qin to bring in uniformity, efficiency, safety and scale. This standardisation will shepherd in one of the most fundamental evolutions in the capital market.
Antonio De Lorenzo is co-founder and Chief Executive Officer of Funder Exchange (FEX). Before starting FEX, Antonio’s career over the last several years spanned fintech and regtech with an emphasis on blockchain in both retail and enterprise applications.
