We’re almost halfway through 2018, and it has already been a rough year for crypto enthusiasts. High-profile scams and other issues seem to have stopped the markets from reaching the highs we saw toward the end of 2017. Add to this the criticism and FUD being spread by financial authorities and the mainstream media, and it’s easy to see why even the most optimistic of us might be rattled.
This seems to be reflected in declining trust in ICOs as a method of fundraising as investors become increasingly wary. Companies are increasingly looking at alternative ways to utilize blockchain technology, and new crowdfunding solutions are emerging that could breathe new life into the crypto world. The ICO might be on its way out, but the cryptosphere is only showing signs of growing. More and more companies are developing blockchain phones, crypto debit cards, and other innovations to bring digital currencies to even more people.
Why ICOs are coming under pressure
This year, we’ve seen several developments that have damaged the reputation of this space. Scams and thefts have rocked the community, and as a result, traditional ICOs have come under fire. One notable example is Centra, an ICO that was charged with fraud by the SEC after receiving endorsements from Floyd Mayweather and DJ Khaled.
Celebrity endorsements practically guarantee publicity, and when this sort of hype encourages people to back a shitcoin, it leaves a lasting impression. Once people get burned, their trust is hard to regain, and Mayweather and Khaled’s massive followings ensured that a great deal of negative attention was placed on the ICO space.
Jay Clayton’s assertions that all ICOs are securities hasn’t helped matters either. The SEC chairman’s comments have been echoed by many of his peers, and this is troubling. Although the financial authorities won’t write the laws that govern crypto, their opinions could sway legislators to take action that favors the status quo.
The rapid growth of the crypto space has demanded the attention of financial authorities, and many are criticizing the lack of regulation. If we ignore the FUD present in their arguments, we have to concede that this is a legitimate concern. Though the benefits of blockchain technologies are obvious, we don’t have systems in place to protect investors, which only discourages widespread adoption.
ICO funding has also come under attack recently on other fronts. The SEC recently launched a ‘scam’ ICO to highlight the dangers present in the space. This was an unorthodox move, to say the least, and it is unclear how many people were genuinely fooled by the stunt. Many crypto news outlets reported on the bogus offering, and so it is possible that members of the community could have engaged with the fake ICO already knowing it was a sham. Whether or not people were fooled by the SEC’s campaign is up for debate, but it put another negative spin on the ICO concept.
Even worse was an insane PR stunt by Yassin Hankir who led backers into believing he’d performed an exit scam. This was widely reported by crypto news outlets, and many backers of SaveDroid were understandably distraught, some believing they had lost their life savings.
People began questioning the trustworthiness of sites like ICObench, speculating that they may have been paid off or were simply inept. This was not the case, of course, but once bad news is out, it is hard to undo the damage. Bad news has a funny habit of sticking around, and it seems like ICOs will face an uphill battle in regaining the trust of the community.
The decline of the ICO is leading to new solutions
All these problems are hampering progress in the crypto space, but the community remains defiant. The crypto space is still growing, the ICO is not dead yet, and blockchain-based projects are emerging in practically every industry. It is likely that the ICO will be replaced by better fundraising methods, and this could allow the space to begin providing the clarity that investors, regulators, and businesses need.
Many businesses are already considering how current methods of blockchain-based funding could be improved upon to meet the demands of regulators and address their own needs. As a result, we’re seeing the space begin to evolve in the wake of problems caused by traditional ICOs. For example, mistrust in the space has led to widespread crypto ad bans. These bans have made it difficult for new projects to attract supporters. In response, many startups now hold airdrops as a way of generating interest.
Airdrops are free token distributions that incentivize the community to learn about and support a project. They are essentially blockchain-based marketing strategies and are likely to stick around even if the ICO eventually dies.
Some projects have decided to develop their own fundraising methods. blockhive, for example, is acquiring funds through ‘initial loan procurement’ – a new form of crowdfunding that uses cryptographic tokens to allow backers to access and sign loan agreements on the blockchain.
Like an ICO, this system allows consumers to buy a company’s native tokens, but instead of using them for services provided by the issuer, backers use them to access legally binding loan agreements. All loan agreements necessitate KYC/AML compliance as well as other steps to protect creditors, which makes ILP regulation-friendly by design.
Borrowing funds is a more traditional way to raise money, but ILPs allow anyone with the funds to become a creditor. This means that startups are not reliant on bankers who may refuse a loan because they don’t like or understand a project. Like the ICO, this method democratizes crowdfunding, but it goes a step further by ensuring legal compliance.
Security Token Offerings (STOs), such as those offered by Polymath, are responding to calls for all tokens to be treated as securities with a shrug of the shoulders as if to say, “Yes, our tokens are securities, and we’re happy to meet current regulatory standards.” This method of fundraising necessitates KYC/AML compliance and allows businesses to raise funds on the blockchain without coming under fire from financial watchdogs.
For businesses that deal with bonds, shares, and other abstract assets, STOs make it possible to keep pace with innovation without the risk of having to completely restructure their business models further down the road. It seems that regulations are inevitable, and the companies already doing their best to comply with them will be hurt the least. STOs are likely to thrive, as many token issuers are forced to waste time adapting to changes in the law. Many companies will fail, and STOs could emerge as the new standard for blockchain-based funding.
We can only speculate on what might happen, but it does appear the ICO is on the wane. It was our first attempt at blockchain-based funding, so naturally, it is far from perfect. Developers are looking for ways to address the problems that plague current ICOs, and they are beginning to find solutions. It is likely only a matter of time before we see them replaced by other systems.
The ICO was the first out of the box, and newer methods will need to catch up first before they can knock the ICO from its perch. However, history shows us that innovation never stops, and we can’t realistically expect the ICO to be around forever.