Blockchain heralds crypto's second coming

At the end of 2017, Unquote reported on the rise of initial coin offerings (ICOs) as a form of start-up funding; businesses had raised more than $3bn via ICOs by September that year. According to ICOData.io, this figure rose to $6.2bn by the end of 2017 and rose again in 2018 to $7.8bn.

However, only $1.6bn of this total was raised in the second half of the year, just $629m in the fourth quarter and only $74.5m in the last month as the prices of cryptocurrencies dropped generally and investors began to question the underlying value of the tokens acquired in ICOs.

"I think what happened was greed came into this game very sharply and very quickly," says Ryan Hanley, managing director at token investment platform TokenMarket. "There were many that we passed up on over the past two years and some of them were quite fanciful. As a general rule, the first question we would ask is why something needs to be on the blockchain and why it needs a token."

Some of the most curious examples included a dog-walking platform and an armed robot that the founders wanted to sell to the US military. Neither of these ICOs were listed on TokenMarket's platform. "At TokenMarket we do a certain amount of due diligence on projects that we list on our platform," says Hanley. "There has to be a compelling case for the business to use blockchain technology for us to list an ICO."

However, not all ICOs fit into this profile. "TokenMarket up to now did ICOs that were largely unregulated," says Hanley, though he adds that the platform undertook a lot of due diligence all the same and its ICOs have performed well. But there was another problem: "Then the ICO market crashed along with Bitcoin and Ethereum."

I think what happened was greed came into this game very sharply and very quickly" – Ryan Hanley, TokenMarket

ICO to STO
The idea of a securitised token offering (STO) was to take all the advantages of distribution and security offered by blockchain technology and apply it to tangible assets. "STOs are more regulated, much like regular shares," says Hanley. "TokenMarket is in Cohort 4 of the Financial Conduct Authority's regulatory sandbox, which allows it to do STOs up to tokenised equity fund raises of €8m."

TokenMarket also demonstrated that it would practice what it preaches, launching its own STO earlier this year, with a £10m target, comprising a retail offering and private placement to sophisticated investors. The company believes it is the first equity token issuance that has been available to retail investors. This opens the door to venture capital firms that either could not, or would not, invest in ICOs. "Our second fund could not legally invest in ICOs," Lakestar's Klaus Hommels told Unquote in July last year. "But to be honest, we have yet to find one that we would have invested in anyway."

More recently, Inovia Capital weighed in on the debate: "We have looked at investing in crypto as an asset without thinking the limited partnership agreement would restrict us from doing so," says general partner Shawn Abbot. But the firm is unconvinced even by the securitised version. "A lot of startups have used it as a form of shadow equity, but there is a lot of confusion about how the value of the enterprise accrues to those two different forms of underlying ownership, so that has stopped us a couple of times," says Abbot.

Different proposition
Others have been faster to embrace this form of security, as YGC's Henry Lieu explains. YGC set up an open-ended hedge fund structure with a target of approximately $200m to invest in crypto assets post-ICO. "YGC will target mature blockchain projects that have already raised venture capital or done an ICO where we can align our interests with founders to work side-by-side with them through the next stage of development," says Lieu.

Lieu says this strategy has attracted the attention of institutional investors because of the extreme differentiation it offers: "The funds-of-funds are interested in us because we are differentiated and, as far as I know, we are the only player doing later-stage investments in this space. We add value in a few ways. We know the blockchain space very well due to our experience, so we can assist on a technical level."

However, firms such as YGC remain the exception and, for the most part, TokenMarket's Hanley's summary seems fair: "A lot of VC firms probably wanted to invest in the earlier ICOs, but it was a bit of a blessing in disguise that they could not because there was a lot of hype and many of the projects turned out not to be viable." VCs will be hoping that STOs prove to be different.

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