In just over ten years, crypto has gone from a white paper to a massive global innovation.
Cryptocurrencies, once thought of as just a fad, are being implemented worldwide, with 154 countries adopting some kind of cryptocurrency usage, Bitcoin still being the most popular. More industries and countries are recognizing the benefits of blockchain technology, with spending on blockchain reaching $2.7 billion worldwide in 2019, an 80% growth over the previous year. There are now over 2,000 different crypto assets available, falling into multiple categories which include cryptocurrency, utility and security tokens, and stablecoins.
The ICO Boom of 2017 — and Its Consequences
Yet the aftermath of the ICO boom of 2017 left some investors out in the cold. Investors poured over $5.6 billion into start-ups offering tokens redeemable for future value or rights in the company to investors as an alternative way of funding, and instead of issuing stock like a traditional IPO.
But only a few hundred of the token projects went on to be successful that year, with upwards of 80% of the ICOs being scams, like Pincoin’s sudden disappearance and Arisebank’s securities fraud. Other projects went dead or failed to launch because they didn’t hit their minimum. And because ICOs are unregulated, any funds lost in scam deals or fraud are nearly unrecoverable.
What went wrong? It seems like one of the biggest failures of the ICO boom was a lack of transparency around who these start-ups were, and how they were going to execute on their token offerings. Investors were jumping on a bandwagon without knowing who was driving or where they were going.
The EDGAR Example
If companies issuing ICOs are attempting to mimic the same kind of results as an IPO, it may help to look at what publicly-traded companies do to inform investors about who they are and what they do. For example, something like the SEC’s EDGAR database that collects and publishes disclosures on millions of companies. Freely available to the public, it allows anyone interested in learning more about a company to look up their history, governance, leadership changes, and actions through annual, quarterly, and current reporting.
Would something like this work for crypto?
In fact, a corporate global registry like the SEC’s EDGAR would be exactly what the crypto industry needs in order to fast-track growth and adoption and move crypto assets quicker down the path towards institutionalization. A platform like this would allow for greater transparency around company activity, allowing investors to make better decisions on where to put their money and resources, and would make the public more aware of upcoming projects.
Implementing a Global Registry
One of the biggest problems that investors face is information asymmetry, so providing more information about a company and their actions will help to inform investors. But beyond just education, a disclosure platform can help investors build trust in what crypto companies are doing, and let investors feel comfortable entering a space that just a few years ago saw so many ICO exit scams.
A disclosure platform would also hold companies issuing crypto assets accountable for their company actions, leadership, and promises — which will lead to a greater level of information responsibility in the industry.
Companies disclosing their information will also be making it easier for investors to evaluate their assets. Better valuation lends better legitimacy to the asset class — and more movement towards institutionalization. Traditional finance uses disclosures to determine valuation, so it would be no different for crypto.
A disclosure platform or registry will also give later-stage investors a history of how crypto projects were managed, any leadership changes, and any early funding. Historical data is also another way to build trust and know that the company is working towards adding value and innovation to the industry.
Since crypto exists outside of government and traditional institutions, there’s no one oversight entity right now. A registry could function as a global hub and standard, a place the industry could look to and rely upon in the absence of governmental oversight.
Challenges to Overcome and Opportunities for Future Growth
But there are challenges to this idea and its implementation, as full compliance couldn’t happen overnight. In fact, that would be the biggest challenge: Moving the crypto industry from a current state of dispersed information to understanding the importance of a registry and what benefits, monetary and otherwise, disclosures could bring.
It’s also a very young industry, driven by developers — not finance people — interested in what the technology can do to push forward new systems. But now that investments in crypto projects have jumped, and now that more companies are issuing crypto assets like utility and security tokens, the industry needs to now embrace crypto’s financial future as an asset class, along with investor relations and protection.
Additionally, any disclosures are currently scattered across the internet. That begs the question of whether it’s reliable. Even if it can be verified, self-disclosed information probably won’t be standardized project to project. Even if investors were to hunt up that information, could they make sense of it? Would they even spend the time looking?
The Future of Crypto
What if a corporate global registry for crypto assets was put in place? What would the industry look like in the future, and what benefits could it offer to the world?
First, we’d see a culture where company disclosures and reporting were the status quo for any company looking to offer crypto options to their investors.
We’d see standardized valuations for crypto assets being created based on these disclosures, and we’d see these valuations and analyses used to compare asset types within the ecosystem.
We’d see information and activity transparency lead to increased investor trust, and better IR management in the short term, especially in light of the 2017 mishandling of investments. As best practices and experiences with investors grow, start-ups will build better relationships with less friction.
We’d see red flags sooner, as disclosures — or failure to disclose — can give regulators a heads up on new scam projects, or token promises that seem too good to be true.
Crypto should be a technology or tool to bring more fairness for all and so-called crypto enthusiasts should focus on efforts to make sure it is happening the right way.
Guest post by James Junwoo Kim from Xangle
Xangle is a global crypto disclosure platform.