ICO Wednesdays: Plus Ca Change...

For the next few weeks, I will be publishing a series of articles about Initial Coin Offerings (ICOs), a subset thereof, securities token offerings (STOs), and the bad-math haven of “tokenomics.” This topic is one that I’ve largely stayed away from for a couple of years and it merits revisiting, particularly in light of the number of questions I get about it from students in my online Oxford Blockchain programme.  

Some of my students have incorrectly asserted that “ICO’s aren’t a thing” and question why we aren’t dedicating significant real estate to STO’s in our online programme. I’m glad to have the opportunity to clear up the confusion. I still hear people talking about “utility coins” and how their lawyers have written a memo asserting that they have a viable exchange of goods and services effectuated over a blockchain and so on. ICO’s are dead, long live ICO’s.  

Given that government legislation and regulation explicitly call out “ICO’s”, the term and the concept aren’t going away any time soon. Along with a proliferation of other slightly-differing terms to describe the issuance of digital tokens, typically involving the conversion of other value into this new token. But consultants and bankers and lawyers, eager to capitalize on mystifying a subject, have promoted "new new" terminology of STO’s, so we are perchance forced to talk about this about that as part of this broader discussion of token-related capital raising and tokenomics.

That said, we do track the evolving regulatory response on the issue of securities offerings that are mediated by distributed ledger technologies where a token is tied to an organization, a product, or a service. It still varies considerably by domicile so in this article series we will focus on the EU, the UK (anticipating divergence shortly), the US, Zurich, Dubai, Singapore, Hong Kong with visits to Malta, Bermuda, Mauritius and perhaps others. (I note that Singapore calls them “Digital Token Offerings” but “DTOs” hasn’t taken off globally.) There’s a nice summary of the confusion prepared by the US Library of Congress. And the OECD has been doing great work to trying to bring differing perspectives together to harmonize international policy.

The blockchain revolution has generated unexpected permutations. Switzerland, for example, has a reputation for conservatism. In spite of this, Switzerland has been at the forefront of the fintech revolution and frontiers of blockchain – less surprising, perhaps, when you consider the history of cryptographic research in Switzerland and its continued tradition of excellence at its universities. I would even argue it is because of Swiss conservatism that they have embraced fintech so ardently. They see the coming tide, and rather than try to call back the ocean, the Swiss have been learning to surf. Metaphorically speaking, at least.

As for “STO’s”, to me, “STO” sounds like a communicable disease, I prefer “token-enabled securities offering”, but let’s swim with the flock, or fly with the pod, or something. We’ll explore STO’s a bit, within the broader concept of ICO’s.  

What are people getting at with STO’s, other than trying to drum up attendance at yet another blockchain conference? In my opinion, we are looking at an effort to create a “safe harbor” of “utility tokens” by arguing for a distinct category of “security tokens” – with only limited success in terms of getting regulators to agree.  

It’s the regulators and policy makers who matter in this conversation and they have been lukewarm to accept the notion that you can issue a digital token, get money for it, and not be required to be transparent on disclosures of the issuing entity, the principals involved, what the money will be used for, etc. – registration disclosures commonly seen with securities offerings. Another way to phrase this thought is that they are all securities tokens, there is no “ICO.” Consumer protection is what’s most commonly raised with respect to why these regulations are necessary, and the alarmingly large number of actual Ponzi schemes we have seen in the past few years is all the justification needed (in 2017, perhaps 80% - or more - of ICO's were Ponzi schemes...and the abuses haven't stopped).

One executive complained to me recently about my calling them “digital assets” and “digital currencies”, instead preferring “cryptoassets” and “cryptocurrencies.” While I agree that anyone who is in the industry will know what you mean when you use those words, words matter. Prepending “crypto” on something makes it sound mysterious and perhaps dangerous to the average regulator or policymaker or consumer. It’s distancing, alienating. â€œDigital” sounds more familiar. And we need to familiarize governments and executives with this new set of technologies if we are going to gain widespread embrace and adoption.

So prepare yourself for a series of columns that will no doubt be out of date as soon as they are published, but that will valiantly endeavor to scan the current market landscape of ICOs and STOs and DTOs and crypto assets, and even be so bold as to suggest future directions. In this series of columns we will go beyond terminology to look more deeply at what’s happening now, what’s being done, and what’s coming next.

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Opinions expressed herein are my own, and may not represent those of the University of Oxford or any other institutions with which I am affiliated. My disclosures can be found on the Visionary Future website.