Crypto-Currencies will Change the World - but they won't change the basics

Financial Regulators all over the world have been getting agitated about investors not knowing what they're getting into when it comes to ICO's (Initial Coin Offerings - crypto-based capital raising). They're often right to be concerned and the fault lies with two sides of the transaction.

First it lies with the investor. It's the old story, if you don't understand it, or its sounds too good to be true ... don't part with your cash! Caveat Emptor. Seriously, if someone tells you that 10% per week ROI is sustainable, wouldn't you raise at least one eyebrow?

That said, governments have a mandate and responsibility to protect their citizens, so no one can be too surprised at their approach, albeit somewhat heavy handed in many instances (China and the US are both guilty in different ways)

Second and more importantly, though is the complete lack of clarity, quality and, quite frankly ethics in some of the capital raising via crypto (i.e. ICOs). White Papers, which have taken the role of the more conventional IM or prospectus, are often incomprehensible or deliberately opaque. There is a strong under-current of "put out a white paper and people will give us money ... don't worry about the business case" that runs through the crypto world at present. These guys are trading on the froth and enthusiasm that is attached to the crypto "brand". A quick browse through the plethora of sites advertising ICOs will reveal capital raising against the flimsiest of business concepts with little or no discernible plan to bring it to reality.

Euphoria / hysteria around crypto-currencies sometimes verges on the ridiculous. Abuses and scams associated with major crypto-currencies have polarised opinion, and FOMO (Fear of Missing Out) has taken a firm grip on many. Look at Kodak, for example - its share price tripled on an announcement that it was going to do an (unspecified) blockchain development.

So where does the right balance lie?

No business is deserving of investors' money if it has no real value proposition. Value is not just a really cool technical concept or hot idea that sounded good to a couple of your best friends. It has to be a concept that brings demonstrable value to an identifiable market or customer group. And it has to be sustainably deliverable.

In short, would people pay for what you're offering to do? And how do you know? Have you even asked them? The lack of verifiable market research backing up so many ICOs at present is staggering. Just because your idea is on the blockchain does not mean that this fundamental rule of commerce is suspended.

Nor does it absolve a company seeking investment dollars from putting in place appropriate governance, risk management and financial prudence. No less than publicly listed companies, the proponents need to remember that they are dealing with other people's money.

The other thing that is missing in many of the white papers that I see daily is crucial. Many lack a viable, demonstrable use case for the coin. In other words, what role does the coin play in driving the activity of your business ecosystem? Is it essential to transacting across that ecosystem and does it have potential, therefore to have self-sustaining value?

While asset-coins are coming and will inevitably become a large part of the crypto-mix, at this stage in the sector's evolution only those coins that can demonstrate that they provide worthwhile usage rights of a system will, in themselves have real value and will survive and thrive. They're also the only ones that will pass the steely glare of regulators until the legislation catches up with the technology.

All of that said, "crypto-capital" has a very real role to play in providing a new path to capital for innovative start-ups and solutions that employ the blockchain technology. It has the potential to fill a significant gap in the conventional funding models for innovation companies, who find it hard to pay their way in the early stages, and whose investors need to have a far longer view than most, as liquidity is often slow in coming. The key element is to be able to demonstrate a viable use case for the coin and a business are for the blockchain to bring value to a clearly defined business / market need. Due diligence, on the part of investors is no less pertinent in this space than any other and transparency and market disclosure (even when no rules are in place) should be seen as a minimum requirement for any company seeking money.

I'm convinced that crypto-tokens and the blockchain technology that enables them will fundamentally change the way in which commerce is transacted in ways that haven't even been dreamt of yet. I'm frankly excited by the potential and it's central to what I do. The technology has a transformative character to it that is yet to be fully explored, and not just in commercial applications.

The bottom line, though ... just because the technology's changed, the basic fundamentals of value creation driving business haven't. Neither has the principal of doing the research before committing money to any venture. Sadly, just as we saw in the early, heady days of dot.com, there's some that would have us suspend that belief. But in reality, the basics remain the same. And so does human nature. The regulators are not wrong to be watching closely.