ICOs are an investment raising vehicle used by cryptocurrency and Blockchain companies to fund projects. They are a little like an IPO in the sense that those investing online in an ICO receive a cryptocurrency token that is then traded on an exchange. They are different to an IPO in that most ICO projects have no track record as a business model, the tokens are not equity nor come with any of the rights that entails and are not regulated so there are no real standards around how companies can present their investment offer. They are a bit like high-tech crowdfunding, but the investment should, if all goes well, be a lot more liquid.
They are also controversial due to a wave of scams taking advantage of the cryptocurrency hype to rob investors through fake ICOs as well as the lack of regulation meaning even ‘genuine’ ones can be considered a very high risk investment. Several countries including China and South Korea have banned them and in the USA the SEC considers ICOs to be securities offerings flouting regulation. The regulator has issued a raft of subpoenas to individuals involved in ICOs in recent months.
However, in an interesting twist, the Californian city of Berkeley, home to the world famous Ivy League University of the same name, is said to be considering its own ICO. It wouldn’t be the first government-backed ICO. Venezuela recently launched a controversial state and oil-backed cryptocurrency, the petro, in a bid to prop up its ailing economy. Estonia is also considering the possibility. The Berkeley idea, being dubbed an Initial Community Offering rather than the usual Initial Coin Offering, would certainly be a first in the USA.
The idea put forward by Berkeley city council member Ben Bartlett is a quite different to Venezuela’s approach and would be a lot more mundane. The Berkeley ICO, if it moves forward, would involve using Blockchain technology to create a new format for municipal bonds, turning them into crypto-assets. This is very different to investing in a typical ICO, which involves taking a punt on an unknown company and product.
Pilot projects involving Blockchain as a potential technology upgrade for stock and other asset exchanges have already been run and a host of banks are also trialing Blockchain payment transfer and clearing systems. The decentralised nature of the technology has the potential to make these kinds of systems much more efficient, cutting out the need for middlemen and central authority control.
Bartlett argues that Blockchain can help make the current system for issuing municipal bonds, which he describes as byzantine, far most efficient and cost effective. The number of middlemen taking a cut means that issuing a bond is currently so expensive it isn’t a practical way to fund smaller municipal projects.
The municipal bond market has been cornered by a select group of global banks who have structured the market to favour ‘very large scale projects’. This, says Jase Wilson, CEO of startup Neighbourly, is at the expense of ‘right size projects’. He gives the example of a community solar microgrid that requires a couple of million dollars of funding. It is ‘very difficult to put that amount of money together’ within current bond funding structures.
Bartlett envisages the Berkeley crypto-bond as being a way for the municipality to efficiently raise investment for individual projects such affordable housing builds. However, trying to get the ICO off the ground isn’t likely to be easy with political, legal and regulatory ‘headwinds’ to overcome. Nonetheless, he is determined to take up the challenge, stating:
“This is a necessary manoeuvre to create resources where there are none.”