MBR_ISSUE 54

BLOCKCHAIN INSIGHTS
Malta Business Review
digital
matters:
THE EVOLUTION OF
BLOCKCHAIN FUNDING
ICOs – Initial Coin Offerings
The original flagship of blockchain funding
was an ICO.
An ICO is a concept of crowdfunding
cryptocurrency and blockchain companies
and projects. ICO stands for Initial Coin
Offering, (sometimes referred to as a
“token-generation event” or “crowdsale”).
An ICO involves a company creating its
own cryptographic tokens and selling them
in exchange for cryptocurrencies with a
purpose of funding the development of
technologies and/or operations. It usually
releases a certain number of cryptotokens
and then sells those tokens to its
intended audience, most commonly in
exchange for Bitcoin, or Ether. As a result,
the company gains capital to fund product
development, expansion and marketing
and the purchasers get access to services
at a discount, or preferential rate to
alternatives.
There are parallels between the concepts
of Initial Public Offering and an ICO.
However, there are several key differences,
the most meaningful of which is that an
IPO involves selling equity in a company,
whereas an ICO is usually the sale of “utility
tokens”, equating to a discount on goods
or services, although often purchased for
high-risk, high-reward speculation.
Within an ICO, the instigating party will
establish a smart-contract (an immutable
piece of code that is published publicly
online) and those willing to participate
will send BTC, or ETH and receive a token.
That token can denote anything (generally
royalty rights, equity, shareholding,
voting rights, or rights to a product, or
service). IPOs are sophisticated fundraising
mechanisms, heavily regulated and limit
participation to a relatively small number
of parties. They require significant
independent review, engagement of legal
firms and other professional parties.
They also carry severe consequences in
the case of non-compliance. Conversely,
ICOs were new and largely untouched by
government regulation during the peak of
their popularity. This meant any project
could launch an ICO, at any time, with little
preparation, and any person could take part
in it and contribute their money. However,
following the 2018 crypto market crash
and subsequent bear market, ICOs have
become very unpopular, with the average
size of ICO and percentage of successful
ICOs falling dramatically.
This is unlikely to change, at least until
there is significant liquidity in the alt-coin
(alternatives to Bitcoin and Ethereum)
market. Even with a buoyant alt-coin
market and significantly restricted supply
of utility tokens, it is difficult to see
many projects offering the immediate
widespread adoption required to underpin
the token price long-term. So, as with any
startup, it is those who have spent funds
wisely, delivered usable products, made
meaningful partnerships and gathered a
sticky userbase, that will survive and thrive
long-term.
STOs – Securities Token Offerings
Overlapping the fall in ICOs, securities
token offerings (STOs) ballooned.
These offer securities represented by
cryptographic tokens.
STOs are much more akin to an IPO than
an ICO, as they often represent partial,
or full shareholder rights. I would argue
that STOs are a natural evolution for a
sector seeing the bottom fall out of tokens
with commonly limited, or no, pegged
value, but also with the steady influx of
sophisticated and institutional investors
engaging with blockchain startups. Seeing
the opportunity in blockchain technology,
these investors are looking to support
the right projects, but demand similar
protections to those they are used to in
traditional funding rounds.
There has been a slower uptake in STOs,
but this is inevitable when one considers
that launching an STO requires finding a
permissive jurisdiction and engaging a full
suite of professional advisors. However, these
factors also have the natural by-product of
weeding out the weaker propositions, and
those solely interested in raising as much
capital as they can, with limited realistic
chance of delivering value for all parties.
IEOs – Initial Exchange Offerings
However dressed, an Initial Exchange
Offering is an ICO, but with the swap for
BTC or ETH made on exchanges.
The advantage to purchasers is assurance
regarding a market for their tokens,
rather than trying to arrange listing on an
exchange with reasonable volumes post-
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