Published by Rodger Oates, Consulting Partner BFSI, Tata Consultancy Services and member, Tech UK on 24 November 2017
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- The Reformer Blog
28 November 2017
Crypto assets, such as Bitcoin, Ethereum and Ripple, are a growing $170 billion industry which should no longer be ignored. Since their inception, mainstream reaction has been somewhat wary of these new assets, how they work and some of their innovative by-products.
Initial coin offerings (ICOs), for example, represent an entirely new model of fundraising, enabling start-ups to diversify their investment options and access capital from across the world through digital platforms. ICOs are a cross between crowdfunding, the practice of financing a project by raising money from a large number of people, and initial public offerings (IPOs), the sale of company shares for the first time.
They allow start-ups to raise capital by selling digital tokens to investors, which act as shares in the company akin to those you would receive in an IPO, in exchange for crypto assets, such as Ether or Bitcoin. When using ICOs, a start-up publishes a broad business plan and, if it generates interest, a smart contract, computer code that can automatically process data and execute agreed rules, is issued through the Ethereum platform, for example, providing tokens on receipt of a virtual currency.
As of 20 October 2017, £1.8 billion globally has been raised through ICOs with the majority being used for digital infrastructure, such as data storage networks like Filecoin and Siacoin (44.2 per cent).
The current market, however, has several issues that must be tackled to reduce investor risk. A lack of clear and accurate information that acknowledges the investor’s potential loss, in addition to the variance in property rights of each token holder (i.e. different types of shares and royalty schemes), are examples of the problems facing investors. The development of best practice and codes of conduct would ensure protection for investors and allow regulators and governments to monitor this growing industry.
To tackle these challenges, Government should work with leading advocates of ICOS to create a best practice guide for token issuance. Such guidance would provide a useful indicator for investors to understand potential risk and nudge the industry to adopt professional standards. This approach could take inspiration from the Peer to Peer Finance Association, created in 2011, which established a set of minimum standards of protection, such as clear marketing messages, bankruptcy procedures and minimum capital requirements for peer to peer lending, and has been approved by the Financial Conduct Authority (FCA).
The implementation of such standards would have several benefits. It would remove the intermediaries that sit between investors and companies, present new opportunities for investors and allow start-ups to directly test the market’s appetite for an idea.
While there may be many benefits to this type of regulation, there are also potential risks. If governments choose to engage with the sector, it may be viewed as a widespread endorsement of all crypto assets. Thus, a public statement that warns of risk may be necessary.
Cryptocurrencies and ICOs are the next frontier of FinTech. While there are risks, an open approach to regulation, which can be based on the Peer to Peer industry, will provide long-lasting benefits to the global economy and consumers.
Simon Taylor, Co-Founder and Blockchain Lead at 11:FS