The crypto-cowboys and the Wild West

Nichola Cooper‘s fifth post in our Emerging Fellows program explores crypto-currencies. The views expressed are those of the author and not necessarily those of the APF or its other members.

In 2013, conference attendees were watching a panel as a young, unassuming, chap describes his idea for an alternative method of capital finance: “…a protocol on top of Bitcoin. It’s going to have new features X, Y, and Z on top of Bitcoin, and here’s who we are and here’s our plan, and here’s our Bitcoin address, and anybody who sends coins to this address owns a piece of our new protocol.” This chap is J.R Willett, who launched the first ICO, of Mastercoin (now called Omnicoin).

The beauty of the Initial Coin Offering as a method of raising capital is found in its simplicity. If you have an idea for a project and need some seed funding. Instead of following the well-trodden path of venture capital and handing over a stake in your project, an ICO allows you to attract community backing without being burdened by the red-tape involved in traditional capital-raising exercises like Initial Public Offerings.

In other words, an ICO is like an IPO except, instead of purchasing a ‘share’ in a business, you are purchasing a ‘token’ in exchange for an agreed bitcoin/Ether value. It is exceptionally popular; growing from 7 ICOs in Q1 of 2017 (US$28m raised in total) to a total of 480 so far in 2018, having raised over US$2.2b for blockchain-based start-ups.

In an unregulated market, the relative ease of conducting an ICO has created a marketplace described by crypto-investors as analogous to the “Wild West”, where the unsophisticated easily fall prey to hoaxes, cloned websites and ‘pump-and-dump’ schemes. Telegram, one of the largest ICOs to date, raised US$830m during pre-sale, but not without fake websites trying to scam crypto from unwise investors.

The equal chance of making or losing a lot of money has attracted regulators’ interest. China and South Korea placing sweeping bans on ICOs and sending the value of cryptocurrencies into freefall. The US Securities and Exchange Commission and ASIC in Australia have warned, regardless of the terminology used, the sale of digital coins may be regulated as securities, meaning operators must comply with local reporting legislation, including maintaining a register of investors.

The outlook for ICOs remains promising, notwithstanding the volatility of the crypto-market. Registration isn’t compulsory, the set-up costs are low and investors rely on the tokens appreciating in value. A successful ICO is predicated, however, on the quality of the advisory team and provision of sound legal advice. That advice now includes the broad reach of the EU General Data Protection Regulation (GDPR). Enforced on 25th May 2018, organisations that fall foul of compliance face potential fines of up to 4% of turnover or EUR20m.

Few people, apparently, realise the jurisdiction of this regulation. The GDPR doesn’t only harmonise privacy laws within Europe but applies to organisations processing data relating to EU subjects. As a Londoner based in Australia, if I participate in KarmaKoffee Melbourne’s ICO, for the sake of illustration, they are not only obliged to comply with securities regulation but, soon, privacy regulation too.

I wonder how many people will be caught unawares by this?

© Nichola Cooper 2018