After the investing landscape experienced a seismic shift with the introduction of the internet, helping investors benefit from lower fees and less latency, the budding initial coin offering (ICO) market could prove to be the epicenter of another investing revolution. While the cryptocurrency space has routinely been criticized as a Ponzi scheme by noteworthy talking heads, most recently Jamie Dimon of JPMorgan, the reality is much more sinister for established institutions.
One of the best weapons wielded by brick and mortar institutions is the opacity that often accompanies initial public offerings. Apart from “selling the sizzle and not the steak”, high profile issues like Snapchat have prominently displayed the willful manipulation of investor sentiment for profit. With the blockchain leading the way for development of decentralized infrastructures that can support identical fundraising activities without the need for advisory services, regulatory approval, and oversight, the real losers from the new paradigm are the classical institutions themselves.
Aside from the prospect of increased transparency and fewer barriers to investor entry, ICOs could permanently impact investor attitudes by enabling greater participation in the actual running and operation of these companies. All told, the blockchain embraces increased democratization of many processes, disrupting the institutional archetype that dominated issuance activities for centuries.
A New Proving Ground
While blockchain technology has been touted for its numerous applications across industries and platforms, one of the more fascinating elements of this new model is the increased participation of its users. For example, the “Proof of Work” concept behind bitcoin is a very meritocratic idea. The technology requires a network (peer-to-peer in this case) which incentivizes participants to process and verify transactions within the system, in this case cryptocurrency. Without the participation of the members, the network would slow or theoretically cease to exist. Although just one example of how democratic principles are permeating through the blockchain environment, others are rapidly emerging.
The principle idea behind democracy is rule by the participants, which arose from the need to decentralize the concentration of power. In modern times, the centralization of financial services provision has effectively sustained a system of oligarchy, whereby established firms and institutions dominate the playing the field. As a consequence, the concentration of power is generally bad for investors in terms of information asymmetry and costs. One of the best merits of ICOs is that they enable companies to fundraise while bypassing institutions and going straight to the investors, eliminating a huge source of fees that are generally borne by investors.
By removing the institutional stranglehold on financing and fundraising, the ICO market presents a whole new array of opportunities to prospective investors of all tiers. Due to lacking institutional involvement, smaller investors actually gain a notable advantage over their more regulated and established peers. However, one the best aspects of the growing presence of ICOs is the democratization of company operations. Generally, one of the features of an issued token may be the chance to participate in a company’s operations and gain useful information for speculative purposes.
There are numerous sources of proof of this model gaining widespread acceptance, one of the best of which is the latest ICO announcement from digital wallet and payment processing provider Cryptopay. The company, which offers a debit card solution attached to a digital wallet alongside related exchange and merchant services, is planning to raise funds after a token issuance demand from users. The degree of stakeholder participation is enabling users of the service to effectively help the company scale operations, a relatively unheard-of development.
While ICOs differ from traditional stock offerings in that investors derive no voting rights or ownership over the company from the tokens, the essence of the Cryptopay example shows that users can be willing investors for the right ideas. Apart from helping to build an unrivaled degree of participation in the process, they can also benefit from speculation in the tokens themselves due to their familiarity with a business and its virtues.
A New, More Democratic Marketplace
If democracy is all about participation and the participants itself, the blockchain and blossoming ICO market are among the best examples of these principles in practice. Besides reducing the role of entrenched interests and promoting meritocracy, the ICO market caters to investors in a way that traditional offerings are unable to compete with. Although there is immense opportunity, changes will also be forthcoming as the space proliferates.
Crackdowns on token issuance in China and South Korea alongside greater scrutiny from the SEC and other global regulatory bodies could challenge the ICO environment’s decentralized design. However, the more transparent and participatory nature of these activities means that the traditional model may very well find its way to the dustbin of history as the blockchain and ICO market matures over time.