Economists once scoffed at the idea that cryptocurrencies would come to replace cold, hard cash. But not only are they more valuable than ever – at the time of writing, the total global value of cryptocurrencies stood at $813.9bn according to CoinMarketCap, the cryptocurrency market capitalisations tracker – increasing numbers of startups are also issuing new ones to raise investment. Dubbed an initial coin offering (ICO), the investment mechanism has turned the world of fundraising upside-down, with the Financial Times reporting there were 587 offerings in 2017 alone. Despite this, many investors are discovering that all that glitters is not gold and many are calling for the sector to be more stringently regulated.
As is the case with many innovations, ICOs were primarily born out of frustration. Many entrepreneurs were looking to get capital into their businesses but traditional means, such as angel investment, venture capital and IPOs, often come with a great deal of fiduciary responsibilities that can significantly lengthen the time it takes to raise funding. “Sometimes the process eclipses the purpose in the fundraising arena: entrepreneurs all get deeply frustrated by having so many hoops to jump through,” says Antony Abell, founder and managing director of TrustMe, the startup developing blockchain-enabled asset-trading platforms that is currently in the process of rolling out its own ICO. “All of these things take time, money, effort and resources and entrepreneurs really wanted to find a more efficient means of raising capital.”
However, over the last couple of years blockchain technology and cryptocurrencies have steadily been eroding the primacy of physical currency. And as increasing numbers of bitcoin barons hit it big and crypto crackshots came up with innovative new tech, they began to wonder if they could help each other out directly and bypass traditional fundraising channels entirely. They hit upon a novel solution: by issuing ‘coins’ – effectively cryptocurrencies unique to their platform – in return for investment in crypto- or traditional currencies, entrepreneurs can capitalise their companies without needing to undergo the same scrutiny required when issuing equity. If the startup later becomes successful, these coins can then either be sold on at their new value or redeemed as tokens against the business’s product or services. This hunch evidently proved sound, as ICOs have proven to be a huge hit. “ICOs have been running for about a year now and there’s already been $2.2bn of investment done up-to-date,” Abell says.
Part of the reason for this rapid uptake is because of the glut of cryptocurrency currently available. Thanks in no small part to the colossal inflation seen in the value of bitcoin over the last few years, there are a great number of people in the blockchain and crypto spaces with money to burn. “There’s a massive amount of money that people have gotten for nothing so they’re quite happy to spread it around,” says Michael Jackson, partner at Mangrove Capital Partners, the early-stage VC firm. This means that many of the early investors in ICOs have been those that have a degree of familiarity with the marketplace and who are willing to take a chance with money they know they can spare. “Basically independent investors are putting money behind projects that they like the look of,” Jackson says. “That means the successful ICOs are the ones that are attractive to people with crypto assets.”
Unfortunately, as ICOs have become more mainstream and the buzz around bitcoin has begun to draw in amateur investors looking to make their millions, increasing numbers of people are getting involved who are much less familiar with investment or the blockchain sector. “Firms like Mangrove Capital Partners are used to venture financing: projects go wrong all the time,” Jackson says. “We’d normally take things step by step and give these projects $500,000 because we know a lot of people can’t even get it off the ground.” However, some startups are issuing ICOs and drawing in £20m, despite not even having demonstrable revenue streams or product-market fit. “Crypto people are raising tons of money for unproven projects and some of those will fail,” says Jackson. “We’re going to see people feeling very disappointed and very cheated.”
And, perhaps inevitably, the gold-rush mentality created by the huge claims being staked has attracted plenty of unscrupulous swindlers eager to profit off of others’ enthusiasm. “There is definitely an element of the wild west to ICOs,” Abell acknowledges. While he feels the top third of the market is offering innovations with enormous potential and the middle third is creating products and services that will – despite their best intentions – falter, clinging to the bottom of the market are plenty of individuals actively looking to exploit investors’ naivety. “Some absolutely ridiculous ICOs have gotten money that shouldn’t have and that has given everybody else a bad name,” he says.
But some believe that issuing cryptocurrencies in return for investment could have risks that extend far past the impact it could have on individual investors. Voices like VC Bill Gurley and Y Combinator president Sam Altman have raised concerns that the excitement and overvaluations seen in the ICO market may be driving a speculation bubble. “Those who witnessed the dotcom era know that when the hype exceeds the reality it’s a very dangerous time,” says Abell. “That’s when there is a real risk of processes running off the rails and people losing money they worked hard for and can’t afford to lose.”
However, this hype isn’t unique to ICOs and even Altman believes that the enormous benefits they can bring far outweigh the risks – as long as the sector is properly regulated. Fortunately, it seems like everyone – including companies issuing ICOs, traditional investors and regulators – is singing from the same hymn sheet. “The Financial Conduct Authority (FCA) is very keen on market transparency with orderly transactions, checks, balances, processes, controls and that’s as it should be,” says Abell. Not only has the FCA issued a very stark health warning to those looking to invest in ICOs but it is engaging with startups like TrustMe through its sandbox innovation programme to help them ensure they are structuring their offerings in a way that protects investors. “We’re very happy they’re doing this and we’re not the only ones,” Abell says. “There are plenty of people that are also very keen to see that happen and are trying to work with the regulators, the private-equity industry and business to get this right.”
Protecting the casual investor’s cash isn’t the only reason to introduce some regulation into the sector though: taking a proactive stance on ICOs could stand the UK in very good stead. “At the moment we’re in a leadership void,” Abell says. While the Chinese government hasn’t yet made it illegal to own or mine cryptocurrencies, it has recently banned both ICOs and bitcoin exchanges. And although the US hasn’t adopted anywhere near so hostile a stance, it hasn’t yet welcomed ICOs with open arms either. Which means Britain could easily claim the title as its own. “There’s a hell of a lot of bitcoin out there right now looking for other asset classes to invest in,” says Abell. “That means if London manages to frame itself as the blue-chip ICO capital of the world, with good processes, regulator approval and adoption, then all of a sudden we’re in a high-growth area of the financial marketplace.” 
