Dear First Stage Investor,
Cryptocurrencies are flying high. Initial coin offerings (ICOs) have already raised a record-breaking $3 billion-plus this year.
But last weekend, as my plane circled over LAX and prepared to land, I was curious…
Was the crypto community overconfident? Was there going to be an obnoxious level of self-congratulatory backslapping at the conference I was invited to?
I was about to find out.
StartEngine held its ICO 2.0 Summit in Santa Monica, California, last week.
I was going to hear a dozen-and-a-half ICO pitches… and was hoping to walk away with one or two that captured my interest.
(As it turns out, I did find one… a potential First Stage Investor portfolio recommendation. It’s an exciting investing opportunity that addresses a gigantic market in an extremely clever way.)
As I feared, there was a little too much cheerleading. No one mentioned a day of reckoning. “A bubble? So what?” was a comment that neatly captured the mood of the conference.
But, to this particular crowd’s credit, these people weren’t totally oblivious to some of the issues casting a shadow over the crypto space.
Their biggest worry? The Securities and Exchange Commission, followed by the possibility that crypto is in a bubble.
Here are some of the more interesting comments I heard on these and other areas of concern…
What Will the SEC Do?
Several lawyers I talked to mentioned the big clue that SEC Chairman Jay Clayton gave just two days prior to the conference.
During unscripted remarks in the middle of a speech at the Institute on Securities Regulation in New York, he said, “I have yet to see an ICO that doesn’t have a sufficient number of hallmarks of a security.”
While some disputed the legal basis of what Clayton said, the lawyers I spoke to at the conference mostly agreed it’s a strong sign as to which way the SEC is leaning as far as ICO regulation.
(This gets into the legal weeds about what qualifies as a security, an issue that deserves its own post. I’ll be writing about it soon after the Thanksgiving holiday.)
If, as feared, the SEC rules that digital coins are actually securities and thus subject to securities regulations, that would make ICOs more complicated and expensive.
Sara Hanks, the CEO of CrowdCheck, said that ICO entrepreneurs should think very carefully about doing an ICO outside of a security designation.
“Even if you have a ‘Plan B’ to revise the legal status of your ICO after the fact, if the SEC says they’re a security, you’d be going down a very expensive path,” Hanks cautioned.
As for the “no harm, no foul” point of view? Hanks pointed out that “a lot of consumer complaints would trigger fed action.”
“The SEC doesn’t hate tokens, but it does hate fraud,” she said.
With consumer complaints on the upswing, this is no minor point. So far this year, the crypto exchange Coinbase has been named in 330 complaints involving hacking, compared to just seven in 2016.
Howard Marks, the CEO of StartEngine, framed the issue best. He said that bringing ICOs out of the shadows and making them compliant with the law is the ICO community’s greatest challenge.
Bubble Behavior?
The issue of a possible crypto bubble was raised several times at the conference. But it was typically raised as a red herring, only to be dismissed by the person who raised it.
Lou Kerner, a partner with Flight Ventures, basically echoed the view that Adam and I have been putting forth.
IT’S EARLY.
Kerner likened crypto’s current state to where Amazon was after its first few years. The stock had risen from $1.50 to $86, an increase of 57X. Is that a bubble?
The online retailer is now trading for around $1,135. Kerner said crypto’s current slide is a blip. There’s no bubble. “Wait 20 years and you’ll see,” he said. Point nicely made.
Mike Jones, CEO of Science Inc., said that bubbles burst when demand contracts. Demand for cryptocurrencies, he said, is rising and will continue to rise.
He’s right. We’ve pointed out that bitcoin exchange Coinbase is adding a mind-blowing 40,000 to 50,000 new users per day. And the institutional investors haven’t even climbed on board yet!
“It’s still too early – even with securitized ICOs,” Jones said. “Institutional investors are simply not interested and remain on the sidelines for now.”
Just one brave person admitted the possibility of a bubble (in ICOs, not cryptocurrencies). Others took issue with his view.
Miko Matsumura, the co-founder of Evercoin, for example, likened the ICO market to a pillow fight. He pointed out that ICOs comprise only $2.5 billion, or 1.2%, of a total crypto market of $208 billion.
“Nobody is getting seriously hurt,” he said. “Everyone has experienced massive gains… and lots of folks are having fun.”
We’ll see if the SEC buys that argument. It’s not known for its fun-loving ways.
A Trio of Concerns
There are several concerns that are definitely worth keeping in mind for ICO entrepreneurs.
- Global issues. One entrepreneur who’s in the middle of an ICO campaign told me he had to hire a lawyer in every country he wants to offer coins in. Each country has different rules and regulations about such offerings. He said it’s very complicated, not to mention expensive.
- The “know your customer” process. ICO campaigners who ignore KYC rules risk the wrath of the SEC, said Hanks.
- A cult of decentralization. Not all smart contracts (on the blockchain) will be enforceable. In the real world, not everything can be decentralized. I was impressed that such a blasphemous point of view was put forward at a crypto conference. Meanwhile, all 15 ICO pitches I heard pushed some form of new decentralization.
Disrupt/decentralize ridesharing? There were two pitches just on this intriguing idea. It’s something to chew on.
The Most Intriguing Fact I Heard
Fidelity has a team of 25 people working full time on crypto. I knew CEO Abigail Johnson was a big believer in crypto, but the news about the team was surprising.
The amount of money sloshing around in the U.S. stock and bond markets totals more than $26 trillion and $31.2 trillion, respectively. If Fidelity can figure out a way to turn a tiny slice of this market into ICO investors, it would be a major coup.
And it would keep the crypto/ICO markets humming along for many years to come.
Good investing,
Andy Gordon
Co-Founder, Early Investing
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Source: Early Investing