ICO start-up funding craze starts to show cracks

Zug is home to Switzerland's Crypto Valley and several ICO foundations Keystone

Fears are growing about the high proportion of early business failures resulting from last year’s “initial coin offering” (ICO) crowdfunding craze, which raised an estimated $4 billion (CHF3.9 billion) worldwide.

Statistics from ICO monitoring platform TokenData show that between 40% and 50% of 2017 vintage firms, which formed using this type of start-up capital, have already failed. This has raised the spectre of an accelerated dotcom bubble-style collapse.

Switzerland emerged as a hub for ICO activity last year, generating some CHF850 million in 2017, according to research by Lucerne University of Applied Sciences and Arts. The adaptation of Swiss foundations as ICO piggy banks also attracted the attention of foreign start-ups such as Tezos and Bancor.

Industry insiders, such as Switzerland’s Crypto Valley Association president Oliver Bussmann, have long been predicting that around 80% of ICO start-ups would eventually flop. But the speed of the collapse has proven something of a surprise.

Investor beware

Another problem is that a large proportion of the funds raised came from the general public on the basis of an idea, typically written down on a White Paper. Initial enthusiasm for ICOs was based on excitement that this paved the way for start-ups to tap into a wider source of funding while democratising the industry by granting the public access to the Next Big Thing.

This principle is now being viewed as paper thin. “The risk for the investor is that a start-up can collect money with a simple Word document. However, the investor does not know whether or how this will be implemented,” Stefan Steiner, co-managing director of the Swiss start-up consultancy Venturelab, told Swiss public television.

There are signs, however, that the industry is professionalising as regulators start to move in. More than 80% of ICO funding raised this year has come from institutional investors rather than the general public, Oliver Bussmann told a Swiss ICO summit last month.

The Swiss Financial Market Supervisory Authority (FINMA) has also issued guidelines to bring ICOs into line with banking, securities and consumer protection laws. In an interview with swissinfo.ch, senior Swiss government official Jörg Gasser, who leads a taskforce charged with bringing order to ICOs, has also dismissed the notion that the industry is a Wild West.

What are ICOs?

Initial coin offerings (ICOs) – also known as Token Gathering Events (TGEs) – are a relatively new method of raising start-up capital for companies. Start-ups give out digital tokens in exchange for “contributions” (usually in the form of cryptocurrencies such as bitcoin) to fund their projects. Rather than award company shares or dividends, these tokens in many cases simply allow people to use the new technology – which is often not yet built.

ICOs took off in 2017, raising an estimated $4 billion globally for blockchain start-ups. This rapid rate of growth has caused regulators in many countries to sit up and take notice. 

ICOs raise three main areas of potential concern: that the crowdfunding system may in some cases be used to launder illicit assets, dodge financial regulations such as securities trading rules or rip off unwary consumers through scams and fraud.