Initial Coin Offerings have been extremely helpful in raising funds for cryptocurrency startups as a means of financial support. However, Adam Vaziri, a known legal counsel and 'FinReg' consultant, points at three key problems that he believes are negatively affecting the current ICO model.
Vaziri is the founder of Diacle and a member of the UK Digital Currency Association.
In a video presentation to over a hundred crypto enthusiasts in the Barcelona Bitcoin community, he said that accountability, misrepresentation and the liquidity of tokens are issues that need to be addressed in order to improve the fundraising model.
He also suggested the need for an independent third party to monitor such a process.
Often at times, founders say they will build the corporate structure once they acquire funding. However, when it comes to the actual ICO, founders or promoters are left receiving Bitcoins and Ether into a wallet they control and there is no legal entity that the purchaser is buying the tokens from.
"This is a very dangerous precedent to set. It is a bad idea for one person to have control over $10 mln of revenue and for entering into a contract where there is no legal entity behind it."
A communications advisor for Blockchain projects, Dominik Zynis, agrees with Vaziri that on many occasions, ICOs do not have corporate structures, the corporate structures are not appropriate or they have a small group of keyholders.
Zynis notes in a chat with Cointelegraph that one of the organizations he advises, WINGS Foundations, which is presently running a backing campaign, is addressing the issue by empowering project DAO communities to use its platform with milestone releases of funds to ensure that the power is in the hands of backers.
However, Zynis believes that Web-based crowdfunding problems cannot be easily addressed by traditional methods, saying the sheer number of ventures in existence will make it impossible, as the recent case of fake news on Facebook illustrates.
This is in response to Vaziri’s claim about misrepresentation that statements made by founders are rarely verified by an independent source and this sometimes leads to promises that are unlikely to be fulfilled, at least in the way they are presented.
Due diligence outsourcing to forums wrong
Vaziri states that while this could be a risk for the purchaser, it could be a clearance for the founders, as even if they don’t need to be regulated for what they are doing or the security does not need to be registered in that situation, their representation to the public has to be correct.
This is important to them as they rely upon it so that they can enter into a contract with the issuer. Otherwise, an identified intent to mislead would expose the founders to fraud claims.
The legal practitioner also faulted a growing trend wherein ICOs outsource due diligence to Reddit and Slack forums saying such a move can only supplement and not replace standard due diligence.
The WINGS advisor notes that there is bound to be a risk of the unknown. He says:
"Certainly, there are often times whereby there are no ways to verify some statements or claims like - will drilling lead to the discovery of an oil field until the work is done? There will always be the risk of the unknown… but I often think of the question - what if “the DAO” had submitted itself to WINGS? WINGS is a virtualized due diligence, valuation and control mechanism for projects and project backers.”
“If we can harness the power of people in Reddit and Slack and give them financial incentives, we can perhaps make sense of some of this crowd information into some intelligible signals and avoid sending $150 mln into a faulty contract."
Zynis notes this could be achieved using the power of the Blockchain combined with the Web so as that there is no need to rely on a particular person or firm for due diligence, but rather on incentivized crowdsourcing.
Making tokens liquid
For Vaziri, the issue of the liquidity of a token is a problem and a benefit if one looks at it from the perspective of standard equity crowdfunding, which is done with illiquid shares.
“It means that when you invest on a crowdfunding platform, you can’t sell your shares the next day,” Vaziri says. “For a retail investor, that is not actually a good thing because a retail investor may not have the same disposable income as a VC investor. As a result, an asset which is illiquid is not a great idea because they may need to be paying a debt for some months, mainly to liquidate assets. So, in principle for the retail investor, a liquid asset is actually quite good."
Zynis thinks liquidity is not just about income but is also an issue of access because coins or tokens represent something other than equity.
"Can you buy a coffee with a share? Does it let you power a smart contract? Can you create a smart asset with it?”
He adds: “Sure, there are definitely coins which are basically like stock equity. But the vast majority of coins have some application set and so their liquidity is governed not just by price speculation but also actual use; something equity will never have. The big question is can the community create enough of a network effect to realize the project’s vision?"