“The ICO market is dead,” said Barry Silbert, head of the Digital Currency Group. Most members of the crypto community agree with an opinion that the initial coin offerings are no longer in demand. According to research by the analytical agency ICORating, crypto startups have begun to practice a new method of collecting money, the STO, which stands for Security Token Offering and means placing security tokens on the exchange.
ICOs in 2018: The Number of Projects Is Still Considerable, but Investors Have Lost Faith
The ICO that gained wide popularity in 2017 is currently at the stage of a decreasing hype and almost complete disappointment on the part of investors. Chief analyst Anastasia Denisova says so based on the research conducted by ICORating. She spoke about the results of the ICOs for three quarters of 2018 at the Crypto Event RIW.
Projects have raised less money, and the size of the fall in the third quarter was more than 70%. Moreover, as Denisova stressed, the market is falling not by the number of projects, as the fraudsters are still trying to capitalize on the credulity of investors, but by their quality. For example, the average amount of capital the project aims to attract does now stand at $1 to $5 billion.
“We analyze projects, provide reports of 30 pages minimum, and see that teams still want to deceive people, raise money, and disappear. That is, fraudsters continue to lie, users continue to believe, and this is a vicious cycle. All those who invested in projects in 2018 are investing in very risky ideas,” said Denisova.
Also, the leading analyst of ICORating spoke about the increasing trend of the flow of investments from Asian countries and that the projects have lost many significant customers in the “lucrative” American and European markets and came to Russia.
“Now companies are turning to the Russian market because users from the United States and other developed countries no longer believe in ICO and do not want to invest in an incomprehensible idea without technical-competent documentation, and often teams represent only a prototype of their projects and do not work on the ‘substance’ of the structure. Therefore, new, often naive investors, can be found in our country. Russian users are still ready to invest in very high-risk ideas that the ICO organizers have on their hands,” said Denisova, but added that more experienced players in the industry have an understanding of the crypto market. Consequently, those who entered the industry at least last year have calculated the risks and hazards of deposits.
The regulatory issue remains essential in the organization of ICOs. The jurisdictions of countries react ambiguously to cryptocurrency and still have not reached an unambiguous conclusion on the definition of digital assets. In the second quarter, according to Anastasia Denisova, Singapore was the leader in terms of mass registration and more straightforward registration of crypto projects, and in the third quarter, this country showed a negative trend in terms of quantity. Therefore, in the summer, the projects moved to the islands.
“This is not connected with comfort, but with the possibility of reducing risks from regulators. Malta is currently developing, although earlier it was not considered legally open to projects. At the moment, there is a more transparent background on the actions of the regulators. And, for example, in Asia, this story with regulation is still unclear. The main thing is that by choosing ‘simple’ countries, the organizers of the ICOs take off the risks and become even more invulnerable,” says the chief analyst at ICORating.
The STO Is Coming to Replace the Former Model for Collecting Money
In 2018, the frustration with ICOs began, as investors fell for scammers who collected the money and then “vanished on vacations on the islands.” The projects that conducted the initial placement of coins offered their investors to participate in a campaign to raise funds for the development of a startup in return for a cryptocurrency such as Bitcoin, Ether, as well as utility tokens as a means of gaining access to the company’s goods or services. The main feature of utility tokens is that they are not an investment in a project. Users do not receive shares in the company and related shareholder rights, as it happens with security tokens.
Because utility tokens do not have any assets that would give them value, there are considerable difficulties with regulation. In particular, the U.S. Securities and Exchange Commission (SEC), which is now trying to control the crypto industry, does not recognize utility tokens, because they are not securities. There are, however, very few “proper” utility coins.
According to the former chairman of the Commodity Futures Trading Commission (CFTC), Gary Gensler, even Ether and Ripple can be considered securities. In March, SEC chairman Jay Clayton also stated that many tokens to which the Commission had already drawn attention were securities: “They offer a material interest in a project in which the buyer of an ICO token, whether you call it a token or a security, says, ‘I am investing in exchange for the promise of future income.’”
Because projects fail to comply with the rules of the regulators, a new definition for internal coins has emerged in the form of security tokens, which have an attachment to a security. Security tokens are backed by assets, profits, and cash flows, so this type of coin has its own value.
Based on the placement of security tokens, the STO (Security Token Offering) appeared. At its core, this process is similar to ICOs, because, after the release, tokens pass into the investor’s possession. In the case of the STO, however, investors send their money to receive dividends, financial inflows, or voting rights, which, like an asset in the fiat industry, are tied to a security.
STOs, by definition, must fully comply with legal regulations. This allows investors from different countries to participate in the crypto project and not violate the laws on the securities of their states. These requirements are significant for countries with tight regulation, for example, as in the United States.
Chainbits co-founder Nathan Rodriguez in his article says that an important aspect of STOs is that they allow companies to whitelist accredited individuals and blacklist unscrupulous individuals. This helps companies comply with KYC requirements and counteract the legalization of criminal proceeds; in particular, to fight money laundering, which is in the ICO.
“The requirements for open information in STOs have a number of advantages: increased corporate responsibility, reduction in the likelihood of fraud, and a proposal to protect the rights of depositors in the event of a company’s bankruptcy,” writes Rodriguez and adds that the STO is more like an IPO in its essence.
The rules established in STOs create a real investment opportunity for institutional investors, which will make it possible to get a massive flow of funds into the blockchain industry and develop it more rapidly. Therefore, according to Denisova, at the moment, when the cryptocurrency rate is far from its best indicators, STOs seem impressive, but despite this, they have their drawbacks.
“Do not forget that the story with security tokens seems to be too low on liquidity because there are a lot of problems with security exchanges. They have long been promised to be launched, but there are no specific movements yet. Besides, the cases of successful STOs can be counted on the fingers of two hands. These are major examples of the likes of tZERO, as well as other interesting projects related to the travel industry. Now there is actually no understanding on the part of investors regarding this direction which is headed toward the STO,” says Denisova.
At the moment, the community, which is interested in listing security tokens, is waiting for the launch of the tZERO platform, a subsidiary of the online retail giant Overstock. The company has entered into a partnership with the operator of the Boston Options Exchange, BOX Digital Markets LLC, on which it will create a trading platform for security tokens. After launch, the attitude toward security tokens is likely to change, but for now, the situation remains vaguely stable.