Unless you’ve been living under a rock, you’ve probably heard the term ICO being tossed around a lot. You may have even participated in a couple already lured in by all the blockchain hype. For those that don’t know, ICO stands for Initial Coin Offering and is a type of fundraising mechanism similar to an initial public offering (IPO), but investors are sold crypto tokens in exchange for bitcoin and ether (or fiat in some cases). Rather, you could say ICOs are more akin to a “Kickstarter” model where you’re not really an “investor”, but a backer donating a pledge in return for benefits or perks. Couple that uncertainty with a history of exploitable technical vulnerabilities as seen with the DAO and you can understand why ICOs are generally considered as more risky investments and require extra diligent research.
Given all the scams and fraudulent activities out there, it’s not surprising that the Securities Exchange Commission (SEC) and other regulators are warning people to make sure they fully understand the companies and their underlying technologies before committing to the projects. ICO Regulations are being implemented as precautionary measures with some countries even banning the offerings altogether. All these new stringent rules are set in hopes to make it harder for the bad guys to take advantage of the system — but what about the projects that are actually meaningful and innovative?
iComplyICO is here to help. A platform that automates legal processes, iComplyICO ensures the compliance required for holding ICOs and enables lawful secondary trading of regulated digital assets. Their Prefacto Compliance Protocol proprietary technology addresses potential issues and verifies trades before they occur, reducing the amount of skepticism and hesitance investors may otherwise have. To further bolster investor security and trust, industry standardized KYC and identity verification are run through an API so issuers will not have to do it themselves.
We got a chance to talk with Matthew Unger, the CEO and Founder of iComplyICO, to learn more about his thoughts on RegTech, blockchain, and his top tips for participating in ICOs.
Trulioo: What would you say are the three biggest reasons or advantages to why businesses should implement RegTech into their core processes?
Matthew: [tweet_dis excerpt=""Following regulations is not optional, it is good business practice to find the most efficient way to do so." — @ungermatt #RegTech"]Following regulations is not optional, it is good business practice to find the most efficient and streamlined way to do so.[/tweet_dis] The beauty of innovation such as smart contracts is that it can be used to enforce regulations using technology rather than people (who have their own interests). With iComplyICO, we are creating a platform that takes an ICO issuer through the process that they need to complete in order to launch a compliant ICO — RegTech helps to demystify the entire compliance process and enhances investor and consumer confidence. I’ve never understood why people do not follow regulations - [tweet_dis excerpt=""Just do #compliance right the first time and it will save you later on." — @ungermatt #RegTech"]just do it right the first time and it will save you later on.[/tweet_dis] In the case of initial coin offerings, RegTech is also helping to enable increased financial literacy, which adds tremendous value by demonstrating integrity.
Trulioo: Where do you see blockchain technology and cryptocurrencies making the most impact in the next five years? How do you see regulations playing a role in this space?
Matthew: While decentralized technology will have a major impact on almost every industry, the infrastructure has already been laid for B2B relationship management and global capital markets securities. Companies that choose to transform their value proposition by integrating this technology will realize the benefits of immutable documentation for communications, supply chain management, and raising capital.
However, this transformation comes with growing pains. The nascent ICO (initial coin offering) market is a perfect example. Similar to the frenzy of the gold rush, the market is a wild west riddled with fraud, theft, and ponzi schemes.
The market is white hot and needs a healthy correction, most of today’s ICOs will fail in the long term because most are not based on sound businesses, a bad project plus an ICO doesn't equal a good project - a Facebook clone with a coin is still as worthless as another Facebook clone.
Recent announcements from China and Germany clearly signal that global capital markets are experiencing severe and increasingly frequent contractions as regulators struggle with a delicate balance of destabilization and innovation. The most recent, and severe, came from SEC Chairman Jay Clayton who fired a metaphorical warning shot - the time for talk is over, expect to see enforcement, the sheriff is in town and he’s got a list.
The ICO capital markets have grown from nothing to $210 Billion in three short years and have operated with virtually zero regard for regulation, due diligence and both consumer and investor protection. [tweet_dis excerpt="In the SEC's eyes, today’s #cryptocurrency exchanges are operating as unlicensed dealers of unregulated securities."]In the eyes of the SEC, today’s cryptocurrency exchanges are operating as unlicensed dealers of unregulated securities.[/tweet_dis] The SEC will be coming down on coin issuers hard in the near future.
However a flood of new, compliant ICOs are set to come to market, likely to cannibalize today’s highest valued non-compliant ICOs (many of which will be required to return their investor’s funds).
We will see compliant alternatives airdropped to the investors of any ICO the SEC targets, thanks to public wallet addresses on most projects. This investor poaching has the potential to cripple these ICOs that do not implement regulation before they are sanctioned. This could sharply correct the market cap of the entire decentralized marketplace in the short term, while at the same time enabling a flood of new capital and projects with due diligence, identity verification, and prefacto compliance automation — where compliance measures take place before a transaction is executed.
Trulioo: What are three pieces of advice you have for people interested in participating in an ICO?
Matthew: Do your research — there are plenty of scams out there.
Check their technology, approach and business model. Only consider investing in ICOs where the token is meaningful part of the solution (such as representing shares, actual utility in a platform, etc.). Just because something can be managed over blockchain doesn’t mean that there is any real benefit in doing so. If the project does not have a clear why, who, how, and when...it is not ready to be listed on a public, decentralized capital market.
Check their documents. Do they publish proof of assurance, feasibility, and security testing on the token? Most of these projects are expecting to raise tens or hundreds of millions of dollars and claim to have ‘leading minds’ and impressive advisory boards.
Check to see if the advisors have publicly said they would participate. Many projects steal the identity or credibility of someone with a good reputation. A perfect example of such identity theft took place in the recent Tapscott deal, where many of the advisors listed on the $100 million project had no knowledge of their name being used in a public offering of licensed securities. Ironically, this project occurred on the TSX, as an opportunity to invest in blockchain technology through a public offering, not an ICO. By comparison, Vitalik Buterin, founder of Ethereum has frequently taken to Twitter to denounce those using his name and reputation dishonestly.
To learn more about iComplyICO and get the latest updates, follow them on Twitter, Facebook, and LinkedIn!
If there’s a fintech company you’d like to see featured in our Fintechs in Vancouver blog series, please submit your request to social@trulioo.com.
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