Matthew Ledvina is a consultant and US tax adviser with specialist knowledge of a variety of investment topics, including art as an investment, artificial intelligence, financial technology and venture capital. Working with a venture capital firm, Matthew Ledvina has a strong focus on technology-based investments.
Blockchain, the technology behind cryptocurrencies, is beginning to revolutionise the venture capital landscape, opening up new opportunities for backing start-ups on a global scale. Initial coin offerings are increasingly being used by blockchain projects both in the early stages and to fund growth for larger companies, creating a globalised investment platform accessible to venture capitalists around the world.
Blockchain technology first became known to the public with the launch of Bitcoin, the world’s first decentralised cryptocurrency. Blockchain created the first solution to digital trust, with a decentralised ledger system that is time-stamped, transparent and prevents the removal of important information. Around five years or so after the launch of Bitcoin, others began to realise that the underpinning blockchain technology could be used as a foundation for many different types of operations, not just cryptocurrencies.
By the beginning of 2018, almost 15% of all financial institutions were utilising blockchain technology. A surge of investment led to the use of blockchain across multiple industries, including healthcare, supply chains, transportation, insurance, voting and contract management, to name but a few.
Initial Coin Offerings
Initial coin offerings (ICOs) are used by start-up companies to raise capital, much in the same way as an initial public offering (IPO). With an IPO, a company sells shares in the business to private investors, who receive returns or dividends on those shares as the company grows and who may be able to sell them on for a higher price at a later date.
An ICO is roughly equivalent to this model but using cryptocurrencies. With an ICO, companies aim to raise funds from investors through launching a new coin, service or app. Investors can buy in using pre-existing digital tokens or fiat currency, in exchange for which they receive new digital tokens that are specific to the investment. The funds from investors can then be used by the company to launch its new product, further its goals or develop a new cryptocurrency, with investors hoping to see returns as their tokens grow in value alongside the fortunes of the company. ICOs essentially work as crowd-funding schemes whereby many different investors can purchase a stake in the offering.
Opening New Markets
Venture capitalists are beginning to see the advantages of ICOs over traditional VC investments as these open up whole new markets to the investor. Historically, venture capital investment has been relatively confined to local markets. ICOs create unique opportunities for the venture capitalist to enter new international markets, making it increasingly possible for an investor on one side of the world to provide funding for a project on the other side of the world. ICOs also break down several of the barriers of traditional venture capitalist investment, such as the necessity of being locked in to the investment for a long period of time.
The Regulatory Environment
At present, most cryptocurrencies and blockchain are largely unregulated, which creates uncertainty with many venture capitalists. As ICOs create more opportunities for venture capital investment, there is an increasing need for more regulations and control. The challenges are in implementing these without stifling innovation. As much blockchain investment crosses geographical boundaries and jurisdictions, clarification on tax matters is required for when investors trade between cryptocurrencies and fiat currencies. Creating regulated exchanges for the management of ICOs could help users differentiate legitimate opportunities and learn more about where exactly their money is going.
There are clearly still a variety of challenges that need to be addressed before venture capital investment in blockchain hits the mainstream. However, with around US$6 billion raised by ICOs in 2017 and about $55 billion raised by venture capital funds, significant opportunities are being created on a global scale.
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