Kenneth Hearn

Fund Manager & Head of Research

Capital markets are essentially the marketplaces where investors and entrepreneurs meet to decide how much capital can be raised and at what cost. The traditional process at play hinders ingenuity with its outdated systems, barriers to entry, and arbitrary codes of conduct; innovation requires freedom. Decentralized environments unleash value by freeing the individual from these constraints. The ICO, despite its shortcomings, enables innovators and accelerates the transition from centralized institutions of the industrial age to a quickly approaching era of decentralized ledger networks.

A new method of raising capital

The original intention of cryptocurrency was to exchange value via the internet without reliance on trust, following the world’s disenchantment with financial systems after 2008’s grand recession. But the birth of the ICO inadvertently created a new method of raising capital, a fundamental breakaway from tradition.

Suddenly, after years of startups having to give it all away before they began, cryptographic technology and decentralised ledgers allowed entrepreneurs to raise cash on their terms.

Initially, the offerings focused on projects to raise capital for the infrastructure and support services for blockchain enabling requirements. These projects continue to boast massive returns given the scalability of the ecosystem from utility to store-of-value.

However, many of the projects that followed were not necessarily needed in the ecosystem at these early stages in the life-cycle of the blockchain infrastructure build. Nevertheless, they provided exciting alternatives to the status quo.

ICO’s offered the means necessary to raise large amounts of cheaper money to build projects, legally speaking in many instances, the founders never had to return any value to the often unsophisticated investors who helped raise the cash. However, this process of convenience de-incentivizes the founder after the capital raise concludes.

Once the cash hits the bank, the drive to push sales becomes questionable at best depending on the integrity of the team behind the project. Further complicating matters is the fact that these ICOs had no accountability to anyone or any regulatory body.

Eventually, regulatory entities began examining and classifying crypto assets. This process birthed the security token and STO (Security Token Offering). Essentially, these tokens offer the holders the same rights as shareholders in traditional companies. This means STOs effectively digitised securities.

Unfortunately, right now regardless of the underlying shift in fundamentals, capital raising in the space sees minimal interest.

STOs and ICOs advantages

So why can we expect continued growth in the token offering sphere? STOs and ICOs carry noteworthy advantages over traditional IPOs:

  • Lower fees — the need for bankers and other middle men is removed and this in turn reduces the fees associated with transactions. Smart contracts will probably also soon remove any need for lawyers, exponentially reducing the paperwork, costs and complexity of managing securities for a much cheaper transaction overall.

  • Speedier execution — if there are large numbers of people involved in any deal it will take longer to execute. Securitized tokens take out the middle men from the transaction, and this accelerates the timeline in which issuers can offer the security successfully.

  • Exposure to the global investor base — with traditional investment transactions, there is a lack of exposure to the global investor base. However, with security tokens, the asset owner can market their deal to anybody who has a working internet connection, and this exposure to the free market will lead to significant changes in the valuation of assets.

  • A wider investor base — if an asset owner can present their deals to anybody with a functioning internet connection, the number of potential investors will substantially increase. The healthy competition is excellent for the financial market.

  • Automated service functions — Security Tokens allow issuers to use a smart contract to make the service provider function automated via software. This means that there is considerably less need for lawyers and when they are required their role will primarily be advisory in capacity.

The market ultimately rewards any process, technology or service able to deliver a cheaper, time efficient and trustworthy product. STOs and ICOs have proven their ability to be both cost and time efficient, and in the long term the market will reward these new capital methodologies if they can gain trust.

In conclusion, we are witnessing a bridging of two worlds: traditional assets are being “digitised”, and digital assets are being “traditionalized”. If you want greater success in raising funds for your own projects, then STO’s or traditional channels are the way to go. ICO’s for tokens with utility attributes are still necessary within the blockchain ecosystem, but they are not advised to be used for primary fund raising — this is why airdrops have become so popular (more on this in our posts to come).

Learn how SwissOne Capital brings qualified investors direct and sensible exposure to the uncorrelated and high growth of the crypto asset class.

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