In 2008, when Satoshi Nakamoto first introduced Bitcoin to the world, nobody would have thought the “virtual currency” will become such a big phenomenon in less than a decade. From being a decentralized source of sending and receiving money to any part of the world, it has transformed into a lucrative investment avenue. It was trading in the single digit range in 2012 and now recently touched $5,000 for one single bitcoin. Now, startups are issuing their own currencies/tokens via initial coin offerings (ICO) to raise funds.
ICO is an unregulated channel of crowdfunding that uses tokens/coins to raise capital for the issuer. In an ICO, investors buy the coins, which can appreciate in value depending upon how successful the business is. The first ICO was by Mastercoin in 2013. It raised approximately $600,000.
The rise of ICOs can be gauged from the fact that almost $1.3 billion has been raised via ICOs by startups this year.
ICO and Equity: Similar or Different?
There are two schools of thought when it comes to ICOs. Many cryptocurrency enthusiasts feel that ICO is similar to an IPO. It sells coins/tokens instead of shares to investors and has the ability to generate lucrative returns if the business takes off. Also, just like IPOs, ICOs are restricted by the number of tokens and the duration during which the company can sell these tokens.
Many lawyers and general investors feel it is a different breed from an IPO. The main difference being an IPO gives investors a right of ownership in the company when they buy the shares whereas, in the case of an ICO, the buyer gets the right to participate and profit from the business’s ecosystem. Tokens only appreciate in value if the project takes off, but tokens do provide other additional benefits. For example, the tokens issued by Storj — a decentralized storage solution — can be exchanged for storage space on the platform. Any ICO that gives the right of ownership to investors is technically offering securities and would thus need to register with the Securities and Exchange Commission (SEC).
When it comes to regulations, ICOs basically enjoy a free run as compared to the heavily regulated IPOs. IPOs require a ton of paperwork, millions of dollars in fees, and months of preparation to ensure they are compliant with all relevant laws. Any company can launch an ICO at any stage of its life, which means investors are open to risk with regards to the legitimacy of the company.
What does the SEC Have to Say About ICOs?
So far, the SEC has not taken any serious stance against cryptocurrencies, but the growing popularity of ICOs has prompted the commission to form regulatory guidelines. In July this year, the SEC issued the results of an investigation into the ICO of DAO – a decentralized venture fund. DAO raised $150 million worth of ether from 11,000 investors and then got hacked out of $50 million worth of virtual currency. More importantly, the DAO tokens were structured as a security.
On July 25th, 2017, the SEC declared that some ICOs will come under the same regulations that are applicable to other similar investments like stocks. The critical thing to note is the ruling did not include “all” type of ICO offerings but it did include those ICOs which are structured like a security. The SEC believes “ICO may provide fair and lawful investment opportunities,” however, they can also be “used improperly to entice investors with the promise of high returns in a new investment space.”
Market Size Comparison: Bonds, Equity, and Cryptocurrency
Fixed income solutions (bonds, treasury) using traditional currency is a fully developed and functional market and has been around for many decades. The size of the U.S. fixed market is almost $40 trillion, and the U.S. corporate bond market in 2016 stood at $8.5 trillion. The U.S. equity market stood at over $25 trillion in February 2017. In comparison, the cryptocurrency market, though growing rapidly, is still a fair bit behind other developed security markets. Cryptocurrency market capitalization as of June 2017 stood at $103.9 billion with Bitcoin being the major player.
Lack of fixed income solutions
The ICO world has always been focused on valuation gains. But the real maturity of this nascent market will be judged by its depth of fixed income solutions for investors. Though many HYIPs (high yield investment programs) like GlobalBid, CryptomineHolding, and Laser were floated in the cryptocurrency market, there are still doubts over their legality. They come across more like a Ponzi scheme versus a safe investment option. The best example could be Bitcoin-Trader HYIP, which disappeared overnight.
This is where the opportunity lies for an entrepreneur who is willing to take the risk and come up with an innovative yet safe fixed income solution that will help in tying both the worlds together (fixed income solutions and the cryptocurrency market). Investors will gladly accept a solution that provides stability and security of fixed income investment solution alongside the higher returns and blockchain benefits of the cryptocurrency market.
Lending Platforms in Fixed Income
The first real breakthrough has been the emergence of peer-to-peer lending platforms using bitcoins. The technology which has revolutionized consumer and small business finance is being utilized by startups in conjunction with cryptocurrencies to offer fixed income solutions to cryptocurrency investors. Though there are not many lending platforms that use cryptocurrency, the few notable ones are mentioned below:
- Bitbond – Headquartered in Berlin, Bitbond is the first global marketplace lending platform for small business loans. Investors simply need to sign up with the platform and deposit bitcoins in their bitcoin wallet, then browse through the available investing opportunities. Once the project is fully funded, the investor starts to receive monthly repayments with interest until the loan matures. The repayments go straight to their bitcoin wallet. The investor can either reinvest or send the coins to a bitcoin exchange to trade it for fiat currency.
Higher Returns – The average APR is 13%, which is pretty high as compared to returns offered by generic P2P lenders.
- Nebeus – Nebeus is an online lending platform based out of the UK and was launched in 2015. It offers services in lending, trading, and remittances. Loans offered by Nebeus have a term of micro (30 days) to standard (360 days). The loan size is determined according to the borrower rating.
Returns – Investors can expect a yield up to 12.5%.
- Getline – Based out of Warsaw, Poland, Getline was established in 2015. It uses a third party platform Esteemify for account verification. Borrowers and investors need to add social accounts as well personal verification details such as bank account, proof of income, etc. Total amount funded so far is 178.86 BTC and the platform usually deals in credit line loans.
Fees – 30% of any profit obtained by the lender.
- BTCPOP – Headquartered in the United Kingdom, BTCPOP was founded in 2014. It is an online lending platform that also has an altcoin exchange and a share market, and it also supports IPOs, bond funding, and trading. It deals in various types of loans like custom personal loans, personal loans with collateral, instant loans, business loans, IPOs, bonds, and instant collateral loans.
Returns – Lenders can expect an APR of 10% or more.
Cryptocurrencies and ICOs are redefining the concept of money and fund raising. But for a jump to the mainstream, fixed income options need to be developed for the wider investor base. P2P lending using virtual currency is a good start, and it seems a major shake up with a fixed income offering is just round the corner.
Written by Heena Dhir.