And vultures are circling to tokenize the world
It’s been a wild ride. The boat cruises. Lavish events. Lambo memes. Champagne on the beach. Conferences across Asia, Europe, Dubai, and the Caribbean. The abundant private VIP dinners and posh after parties sponsored by some hot new ICO. On and on and on.
Now the blockchain party is over.
It’s time to build real products and deliver on the dream sold through white papers and barely functional MVPs. That means blockchain founders need to step up and execute — regardless of the value of tokens or their crypto portfolio. Blockchain isn’t about enriching ourselves — it’s about a revolution to co-create a better world.
Meanwhile rich elites who don’t really care about the underlying tech or vision want to take advantage of a new financial instrument to tokenize everything and extract all of wealth and value. I see them in every blockchain meetup and event these days in NYC.
STOs are the new ICOs, they say. After following cryptocurrency for years without getting in, security token offerings make sense to Wall Street investors and hedge funds. They deal with securities all day long. That’s all they do. FOMO is strong. They won’t miss out this time.
Uncaring about the practical utility of blockchain technologies, they look to impose an extractive model from Wall Street through fractional ownership that transforms everything into a security. This will provide instant liquidity and could ultimately displace and replace the stock market. In this future, wealthy elites could buy and sell every aspect of your life.
The Race is On — Visionaries vs. Vultures
The race is on to execute and manifest the vision for a more interdependent, decentralized and transparent world enabled by blockchain technologies. It’s a race to beat the vulture capitalists and bankers that Satoshi Nakamoto intended to disrupt when she wrote the original Bitcoin white paper.
Lines are being drawn for what kind of world we want to live in. There are serious choices to make and consequences for the types of outcomes that follow. It is not an understatement to say that this is perhaps the defining question of our time regarding the future of human civilization.
Do we want to live in an inclusive world that shares value and empowers everyone, or will we continue to perpetuate wealth extraction?
Will the blockchain ecosystem deliver on the vision of Satoshi Nakamoto, or will it accelerate a new wave of unprecedented inequality?
Will your children grow up with abundant opportunities to realize their potential, or will they inherit a dystopian nightmare?
How The Blockchain Party Ended
The blockchain space initially attracted a renegade group of visionary developers, eccentric finance people, creative marketers and community builders, and high risk takers united by a common vision of co-creating a better world that challenged the status quo.
These early-adopters bold enough to take on the power of big banks, sovereign nations, and global corporate elites accomplished something almost unthinkable in 10 years— they collectively created a decentralized network and infrastructure with enough traction to start delivering on their promise.
Empowered by the battle cry of HODL!!!!! they placed faith in the vision of Satoshi Nakamoto that things would work out. Bitcoin would eventually go up in value. Developers would eventually ship great products. The blockchain ecosystem would continue to grow, fueled by the vehicle of the ICO.
The amount of token sales increased exponentially to make the ICO market incredibly competitive, peaking in February 2018 shortly after a major correction, or crash of bitcoin. Then the market bottomed out and flat lined, drying up the abundant crypto flowing. More sales, less money to go around. Basic law of supply and demand will tell you many ICOs failed as a result.
Facebook, Twitter, and Google Adwords banned cryptocurrency ads due to a high volume of scams and speculative risk taking. Big splashy ICOs with simple marketing funnels driving people to landing pages phased out. Private token sales became the new norm with massive 80–100% bonuses to attract early investors. Retail investors were boxed out.
That led ICO marketing to shift towards private VIP events catering to whales, a mix of savvy crypto investors who made fortunes in the ICO boom and investment bankers, real estate moguls, and traditional industry heads throwing money at things really didn’t understand.
Meanwhile exchanges like Binance charge up to $1m for listings. Blockchain companies needed to spend substantial amounts of their token sale proceeds on market making in order to hit a certain amount of trade volume. Those who didn’t risked having their tokens crash.
Then token prices crashed anyways because all trading was tied to BTC and ETH. When the price was up, crypto whales had extra ETH to spread around in the ecosystem. When it was down. they went to private OTC deals or stopped investing. Secondary market trading slowed on exchanges.
Meanwhile SEC regulators in the US said all tokens are basically securities. This pushed token sales through places like Malta, Gibraltar, Singapore, or the Cayman Islands. US citizens were mostly either banned from participating, or only allowed if they were accredited investors.
All of this basically killed the ICO. It’s nearly impossible, if not illegal, to do a token sale that isn’t for a security token, or STO. Even companies that thought their sales were legal are finding the SEC taking legal action. Retail investors can’t participate in STOs due to securities laws. The paradigm of wealthy elites controlling access to deals is replicating itself again.
The blockchain party is over. Now it’s time to execute and deliver on the promise in order to attract investment, scale development, and drive mass adoption. It’s time for real utility, not speculation. It’s time to double down on core values, refine focus, and revolutionize the world.
There are two interrelated problems to address and a possible path forward.
Problem 1 — Utility Tokens without Real Utility
ICOs were primarily for utility tokens. Investors would speculate on the value of a token within the context of how a blockchain platform will work based on a white paper and MVP i.e. its future utility. The biggest ICOs tended to be for platforms and protocols. The pipes, or infrastructure, of future ecosystems.
This is a basic chicken and egg problem. Crypto investors have almost no appetite for useful applications. They want to invest in infrastructure. If you own the land and the soil, then you benefit from the buildings, crops, and everything built on top of it. However, if there are all chickens and no eggs, then everything dies within a generation.
Union Square Ventures recently published a great article on the myth of the infrastructure phase. Looking at historical data, they found that useful apps drive development of infrastructure to support scale and address specific needs. One might argue that blockchain apps and infrastructure are being developed in parallel, but investment dollars aren’t evenly distributed.
The biggest problem here is that protocols only work if you can get developers to build on top of them. Protocols sound great in theory. In practice is another story. Founding teams are developers, who know almost nothing about how to build community. Most protocols have terrible UX and poor documentation, making their protocols nearly impossible to use.
There are serious obstacles to user adoption. The entire ETH ecosystem for example basically requires people to learn how to use MetaMask, which is confusing and complicated for most of the general population. The beauty of source code doesn’t matter if there is no practical utility for end users.
Many blockchain founders don’t know what to do, how to execute, or where to prioritize their focus. Part of the reason why investors replace founders in traditional VC-funded companies is because the skill sets required to build an early-stage startup are different than the ones needed to scale.
The truth is it’s hard to build a real company with millions of users and working products that solve real problems, while addressing the engineering challenges of scaling infrastructure. Decentralizing everything and relying upon an external developer community is an added layer of complexity.
It also takes time. Typically a company would receive $25–100m in funding after years of development, hiring 100+ employees, successfully generating revenue and hitting clear milestones for growth and adoption. ICOs received a comparable amount from a white paper and MVP.
The token sale as a vehicle to raise funds has been proven through ICOs, though blockchain companies are yet to deliver on their promise to release functional, real products that millions of people want to use.
Blockchain ecosystems won’t magically build themselves. Utility tokens need real utility. Blockchain founders must invest in community building, UX and design, and tell a story that investors, media, and customers understand. Otherwise they will never attract users.
The blockchain party is over. It’s time to build real products and platforms with practical utility that the world wants and needs.
Problem 2 — Tokenization of Securities without care for Real Utility
The privileged rich investors who are now entering the space don’t know or care much about blockchain. They care about liquidity, not utility. They want predictable, fast and high returns through financial instruments that can be easily traded and manipulated.
Fractional ownership of an instantly tradable asset like a security token is incredibly appealing to investors. They no longer have to wait 3–5 years for an exit via an acquisition or IPO. They can get massive discounts for participating in a deal at an early stage comparable to a traditional seed or Series A round, with significantly less risk.
If a project looks bad or fails to execute, they can dump their tokens and pull out their money. If it takes off, they can pull out their initial investment and let the rest ride. Security tokens eliminate the need to do an IPO. Why issue stocks when security tokens are far superior to all parties?
I believe the massive benefits of the STO will eventually replace the IPO, and in turn will kill the stock market in 10–20 years. Many of the tech savvy investment bankers I speak to agree with this assessment, though few would feel comfortable speaking about it publicly given their clients on Wall Street.
STOs have the potential to revolutionize global financial markets and reshape the world economy. Companies like Airbnb are leading this revolution through asking the SEC for permission to offer equity to hosts. The fractional ownership model presents a hopeful opportunity for value distribution, increased participation, and financial inclusion.
However, the major challenge we face now is that most investors don’t care about any of that. They care about making more money. The opportunity to get instant liquidity and quickly flip security tokens encourages greater risk taking to maximize short-term profits.
If we are not careful, the STO could easily become the new credit default swap — an instrument designed for a specific subset of investors, which became misused, manipulated, and crashed the global economy.
A Path Forward — STOs with optional Utility Tokens
Nobody wins in an economy where a small class of elites control all of the wealth and the rest of the population struggles to get by. A healthy economy needs a strong middle class with expendable income to buy things, driving growth across industries and reaping healthy long-term returns to investors.
The STO and tokenization is here to stay and is likely to replace the ICO of utility tokens as a mechanism for fundraising. A superior financial instrument than stocks that traditional investors have an appetite to buy (especially hedge funds and Wall Street bankers), STOs present opportunities to raise funds from a new class of investors without having to force a utility token function into the product and white paper.
In the long run, this could be good for everyone. Blockchain projects can develop utility tokens only when they need them. In fact, eliminating the need to force a utility token into projects for the sole purpose of doing an ICO could become a driver for blockchain adoption and simplify product development.
As the co-founder of Blox 7, an agency specializing in New Economy Storytelling and marketing communications for blockchain and emergent tech, I can tell you it is much easier to explain the blockchain to potential investors, media and customers without going into how a token works. Removing complexity from the story through STOs could make it easier to raise money and scale adoption.
Blockchain platforms have the potential to mitigate risk against fraud, provide greater transparency, encourage sustainability and more efficient supply chains, and more. They can also empower users to monetize their data and earn utility tokens, which creates incentive structures for users to build and grow companies.
As threats of automation due to AI and technology risk replacing jobs, a fully realized and functioning blockchain ecosystem might generate enough supplementary sources of revenue through earning utility tokens to function like a form of basic income. It also has the potential to uplift billions of people out of poverty, many of whom will come online for the first time in the next 10–20 years.
The race is on to build functional blockchain products and real companies worthy of attracting investment. A new two-token model may become the norm, where companies sell security tokens for a raise which can be traded similar to stocks and the current alt-coin exchanges, and then issue utility tokens for use on their platforms, which function like stable coins having a fixed value that doesn’t go up or down.
For example, look at SocialFlow’s current security token sale for the Universal Attention Token. An existing company with a $100m+ valuation, they aim to use the blockchain to disrupt conventional advertising. Margins for ads are small — they cannot have a utility token fluctuate in value. Their utility token will function like a stable coin within its new ad publishing platform.
SocialFlow probably could have raised an equity round and closed it entirely from existing investors. Instead, they chose to do an STO as a way to show faith in the mechanics of a working blockchain example. Their use of blockchain case (utility token, built on the Stellar Consensus Protocol) and securitization case on the blockchain isn’t tapping into a fad. It’s the right path forward from a company positioned to disrupt the global advertising market.
The Big Unknown — Secondary Exchanges and Global Markets
The big unknown in this equation is that ICOs and utility tokens tend to be pegged to the price of bitcoin and mediated as such through sales on exchanges. Security tokens will be sold on separate exchanges. As securities, their value should be more closely tied to company performance similar to stocks. It is unclear to what extent the rise and fall of bitcoin will impact price.
If STOs become the new norm for raising capital (which I think will happen in the next 12–24 months), what will happen to the price of bitcoin and the 2,000+ current alt-coins / utility tokens? Will utility tokens earned through blockchain platforms using a two-token model be sold in utility token exchanges? How will this play out in regulations around the world? Will the price of bitcoin go up again and we enter a new bull run, or will a massive consolidation happen and many alt-coins never recover?
Meanwhile jurisdictions outside of the US like Singapore, Malta, Gibraltar, Cayman Islands, and more facilitate legal sales of utility tokens but not securities. As the US heads down the path of security token sales, global markets could continue to do utility token sales and simply exclude US investors. Thus we could look at the blockchain ecosystem being divided along geographical lines. Many US blockchain companies are relocating elsewhere and consider the US losing its place in the global blockchain ecosystem, including TechCrunch founder Michael Arrington.
What’s also interesting in this equation is that hedge funds and investment bankers have a bigger appetite for security tokens right now than traditional venture capitalists and tech investors. STOs coming to market are being bought up by Wall Street. Silicon Valley early-stage investors who historically have been more prone to take risk are backing off due to the regulatory landscape. They’ve also been burned over the past year with the crash of crypto markets while Wall Street sat on the sidelines. Follow-on VC firms who put money in after lead investors are especially scared.
Ultimately, a utility token with a fixed price is better for end users. Volatility is a major problem for mass adoption. Imagine you earn $10,000 worth of tokens on a platform and need to pay for college tuition or your mortgage, and then a week later they are worth $5,000 because the price of bitcoin crashed again. Would you ever trust or use a platform again?
What this means is the current market of trading utility tokens based on speculative future value is not in the best interests of end users. A stable utility token market, in turn, gives no returns to investors. Thus the future of the current $200B market cap cryptocurrency ecosystem is unclear.
A Call to Action — Let’s Get Back to Work
As Wall Street hedge funds and investment bankers enter the space, blockchain is also entering the enterprise. This requires an entirely new level of support and sales process similar to the SaaS model. I think enterprise blockchain adoption will legitimize and professionalize the industry.
Dispatch Labs is a great example of a protocol designed to enable any data-driven application to transition easily to blockchain. They also have a GDPR-ready protocol to comply with the EU General Data Protection Regulation (GDPR). They are bringing blockchain into the enterprise with real business use cases, clear documentation, and great community support.
Dispatch CEO Matt McGraw partly inspired me to write this after his recent Facebook post expressing frustration about the endless events and party hype around blockchain. A Silicon Valley veteran and serial entrepreneur, he knows how hard it is to build a real company with functional products people want to use. The time to party is after you succeed in hitting milestones and executing.
Let’s put down the champagne glasses and get back to work. The only way to co-create a better future is for blockchain founders to push ahead and build great products. Infrastructure projects must invest in developer communities, documentation and content, UX and design. Hire and recruit experienced talent that have skill sets and experience to scale engineering, marketing and PR to reach mass adoption.
All of this will attract more investment, which in turn will drive a revolution in the global financial system. Wall Street may be circling like vultures now, but this is largely because blockchain founders are yet to deliver practical business use cases and prove out the model. This will take time. The pressure is definitely on and the money will start to pour in with STOs next year. I predict a massive bull run in 2019 once the regulatory landscape becomes more clear.
As co-founder of Blockchain for Good and co-founder of Blox 7, my place and commitment to telling this story is clear. The race is on. Money always follows innovation because innovators yield the highest returns. I tracked a similar pattern in my second book Disruption Revolution, and predicted a more inclusive future in my most recent book Empower. Let’s deliver on the vision of Satoshi Nakamoto and co-create the future we want and deserve!