In the course of the last year, the crypto asset market witnessed both an impressive bullish spree and a well-executed bear campaign that entailed a dramatic fall in prices and subsequent decrease in volatility of major crypto assets. While the rollercoaster ride was expected by most serious investors and is nothing more than another episode in the long upward move of digital assets, another event caused much greater harm to the tokenisation of the wider economy.
Over 2017–2018, a large number of developers, programmers, marketing professionals, lawyers and other participants of the crypto movement exhibited avarice, a lack of responsibility and the betrayal of some of the most basic principles of the crypto economy. Many teams exemplified lazy and irresponsible conduct by using massive media campaigns in conjunction with the ignorance of mainstream investors to launch outright scams, as well as manifestly weak and unworkable projects. As a result, in 2016–2018 the total number of ‘successful’ ICOs (i.e. those that met their funding targets) exceeded 1,500. At the same time, the website Deadcoins.com, which maintains a record of ‘dead’ cryptocurrencies, currently lists 911 digital assets whose price does not exceed 1 cent.
More than half of crypto startups that attract funds by selling digital tokens cease displaying any activity within just four months of their ICO, as evidenced by the latest academic study from Boston College.
According to the June report from ICOrating, 70% of tokens issued after an ICO conducted this year have yet to be listed on an exchange — and, say the analysts, most of them never will be.
Representatives of the US Federal Trade Commission declared that in 2017 crypto investors lost almost $1 billion due to participation in fraudulent or irresponsible ICOs, and will lose some $3 billion in 2018. The main reason for this threefold growth is the irresponsible or fraudulent character of ICOs conducted in 2017, which will become fully evident only in 2018 — inevitably reducing the price of the tokens to zero in the process.
The mistakes and lack of responsibility exhibited by many participants of the blockchain movement have been leveraged by traditional investment institutions and law firms specialising in private equity, diluting and sidetracking the very essence of the crypto economy. Over the last two or three months, the narrative has evolved with attempts to force digital assets to fit within the Procrustean bed of traditional investment legislation. This legislation was essentially established in 1933 and recently patched up within the framework of the JOBS Act, signed by Barack Obama in 2012. For the first time, this law enables non-accredited investors (around 97% of the US population) to use crowdfunding equity to purchase shares in startups. However, these opportunities are few and far between, and extensive preparation — both accounting and legal — is required before the company can gain access to equity crowdfunding. This preparation, in turn, entails significant expense. It is against this background that, for the last three or four months, Internet business media have been promoting the idea that the future of the token economy is in qualified investors and institutional finance.
On the one hand, the arrival of qualified investors and institutional finance to the crypto asset market will surely have a positive impact on the value of tokens representing projects with solid developmental, financial, economic and marketing bases.
On the other hand, the removal or marginalisation of non-qualified investors will more than likely lead to the collapse of the existing model, in which blockchain projects rely on the wider global community — and particularly millennials.
To designate an investor as ‘qualified’, the overwhelming majority of jurisdictions use the criterion of net accumulated wealth (unobligated) and/or annual income. To become a qualified investor, one has to possess either capital of $1 million, on one’s own or shared with a spouse (excluding main residence), or to enjoy an income of over $200,000 for each of the last two years, or over $300,000 if shared with the spouse for the same period of time. Requirements for qualified investors are no easier for the UK and most EU countries.
According to Dow Jones, 8.25% of American households (or 10,108,811 households) fall into the ‘qualified investor’ category. They possess 70.3% of all private wealth, or a colossal $45.5 trillion.
The same research shows that young investors comprise less than 2.55% of US accredited investors. At the same time, according to my own calculations based on the profile data of developers, programmers and founders of blockchain projects represented on LinkedIn, in 2017 the average age of blockchain industry teams ranges from 27 to 30 years, depending on the criteria used.
It is not difficult to conclude that the imposition of existing legislation concerning accredited investors in the US and other leading countries upon the blockchain community will not only endanger the main social capital of the token economy, but will also lead to the exploitation of young blockchain industry teams by older investors.
Undoubtedly. It should be remembered that US securities legislation mainly dates from 1933, when not only there was no Internet but even home television sets were few in number.
Assuming we don’t throw the baby out with the bath water, some requirements on investment in blockchain projects by accredited investors might still be accepted. However, in the high-tech fields the very notion of the ‘accredited investor’ should be modified. It should be brought in line with technological realities and, simply, with common sense. In the new and fast-moving world of blockchain, where different types of revenue model exist, the use of the property criterion to define who is an accredited investor is obsolete. Many older investors with substantial incomes do not understand much about the high-tech world, and specifically the blockchain sphere. In the case of investment in the high-tech field, rather than using net wealth and annual net income to define an accredited investor, we might take into consideration the level of education of the investors and, possibly, as an additional criterion, their professional occupation.
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