The takeaway: Initial coin offerings, more commonly called ICOs, have a bad reputation. But that may be undeserved, as ICOs remain a powerful tool for retail investors and founders to participate in capital markets, writes Web3 business development manager at Amazon Web Services Don Phan.
Dev Activity
The Floki Inu community voted to burn 4.2 trillion FLOKI tokens, part of a recent DAO proposal to limit exposure to a cross-chain bridge and reduce transaction fees. A so-called “transaction tax” on FLOKI, which has rallied more than 100% in the past week, will be lowered to 0.3% effective Feb. 3, while the $100 million worth of FLOKI will be removed from circulation on Feb. 9, as the meme-themed project looks to bolster its position in decentralized finance. Meanwhile, Fantom is releasing “version 2” of its DeFi-friendly fUSD stablecoin that enables holders to pay fantom (FTM) or fUSD for transaction fees and better predict future costs based on usage. No timeline was given. Existing fUSD positions will be closed out, with Fantom building a stablecoin swap tool to help settle outstanding debt. Finally, the English Premier League has signed a $150 million deal with SoftBank-backed digital trading card company Sorare to join a NFT-based fantasy soccer club. Sorare is under investigation by U.K. and French gambling regulators to ascertain whether it needs gambling licenses.
Press ‘F’
Sam Bankman-Fried’s bail conditions may be updated. The FTX founder’s lawyers are pushing to allow him access to corporate assets, saying there’s no evidence he misspent funds, as the U.S. Department of Justice looks to bar SBF from communicating privately with current and former FTX and Alameda Research employees and his use of encrypted chat platforms. In a recent filing, the DOJ said SBF allegedly contacted a potential witness in the case, FTX General Counsel Ryne Miller, to influence his testimony. Meanwhile, FTX is seeking to remove Turkish units from the bankruptcy case, saying authorities in the country are unlikely to comply with U.S. courts, as U.K. authorities open a probe into a charity backed by Sam Bankman-Fried, regarding the source and use of its funding. Finally, perhaps regretfully, newly released Australian Securities and Investments Commission documents show at least one regulator raised concerns about FTX’s investment claims prior to the exchange’s launch in the country in March 2022.
Legal Happenings
The New York Department of Financial Services (NYDFS) is investigating crypto exchange Gemini over claims it made related to the safety of its customers’ assets. Last year, Gemini reportedly said the Federal Deposit Insurance Corporation (FDIC) was protecting assets deposited into the now-defunct Earn lending product that’s at the center of a Securities and Exchange Commission investigation and bankruptcy dispute. Separately, the Securities and Exchange Commission of the Philippines is requesting public comment through Feb. 7 on how to implement a consumer protections law. President Rodrigo R. Duterte approved the plans last May. Finally, CoinDesk obtained emails that shed light on the dispute between Binance and India’s largest crypto exchange, WazirX, over who owns the exchange. WazirX, which is under investigation by the Indian government, claims it was acquired – though Binance disputes the arrangement. This comes as Binance launches a prepaid crypto card in Brazil in partnership with Mastercard.
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Sound Bites: Big Buyers
“Institutions are still here.”
– Coinbase Head of Institutional Research David Duong, on CoinDesk TV’s “First Mover.”
The Takeaway: Reconsidering ICOs
In the fallout over FTX, U.S. Senate Banking Committee Chairman Sherrod Brown (D-Ohio) recently announced he is considering legislation aimed at protecting retail investors from cryptocurrency fraud. Legislators and regulators should proceed with caution. Casual observers may be skeptical of the innovation of cryptocurrencies, but the clearest innovation has been initial coin offerings (ICO).
ICOs have allowed entrepreneurs to raise money, circumventing the thicket of decades-old Sarbanes-Oxley regulations. Members of Congress serious about economic growth should be encouraging initial coin offerings and rein in the U.S. Security and Exchange Commission’s regulatory overreach.
Initial coin offerings are a technological innovation that disrupts the current fundraising apparatus calcified after passage of Sarbanes-Oxley. Sarbanes-Oxley should serve as a cautionary tale. Passed in the aftermath of the Enron-Arthur Anderson accounting scandal, the protocol was meant to boost investor confidence and protect retail investors. However, Sarbanes-Oxley has only made it more difficult for entrepreneurs to access public capital markets. Startups are now staying private longer precisely because accessing money from the public markets has become so burdensome.
Kickstarters Need a Kickstart
The U.S. Congress took a step in the right direction with the Jumpstart Our Business Startups Act (JOBS Act of 2013), which promoted equity crowdfunding, the kind most associated with platforms such as Kickstarter and AngelList. The intent of Congress was to allow more investors to take part in the growth of early-stage startups and for startup founders to be able to raise money from a much wider range of people.
While online crowdfunding was innovative for its time, Kickstarter and AngelList are centralized platforms and limited in their scale. The intent of Congress was to make fundraising easier for founders to raise from small investors, exactly what ICOs do so well. According to CB Insights, $19 billion has been raised since 2013 through ICOs, while only $969 million has been raised through equity crowdfunding. Clearly, ICOs have won out.
The SEC bears the most responsibility for giving ICOs a bad name and has vastly overstepped its authority as an executive regulatory agency. The SEC does not have final say over cryptocurrency regulation – Congress does. While the JOBS Act intended to make fundraising easier, the SEC is pushing for an overregulated regime that replicates the worst features of Sarbanes-Oxley.
If the SEC gets its way, fewer retail investors will be able to take part in the growth of early-stage startups and startup founders will only be able to raise from a limited range of sources. The chilling effects of possible SEC enforcement can be seen in how cryptocurrency entrepreneurs must contort themselves to avoid the “ICO” term for fear of an SEC crackdown. Founders now use incomprehensible terms such as “initial decentralized offering” (IDO) and “token generation event” (TGE) to disguise what would otherwise be a simple fundraising exercise.
Fraud or failure?
A regularly quoted statistic is that most ICO-backed ventures shut down within four months. Legislators and regulators need to convincingly distinguish between fraud and failure. Business failure is not a crime and should be encouraged by lawmakers attempting to encourage economic growth. Regulation is often a zero-sum game because rules aimed at protecting retail investors – the proverbial grandmother who has lost her life savings in the latest crypto fad – come at a real cost to entrepreneurs, who must contend with more rules while being starved of the capital needed to grow their businesses.
Chairmen Brown and Gensler may be sincere in their desires to support growth and tech entrepreneurship, but they risk strangling the clearest source of funding for future innovation. If more regulations pass, it is foreseeable the innovative startups of the future will be built in foreign countries, far away from Silicon Valley, far from American shores.
How did so many Jane Street traders wind up at FTX? (Protos)
Andreessen Horowitz sped up crypto dealmaking in 2022 (Axios)
Jay Jog, co-founder of Sei Labs, and the founder of Dainamic propose four principles for crypto reg, in policy-focused publication (The Hill – Opinion)
Coinshare’s latest weekly report shows a surge in bitcoin inflows (blog)
Sam Bankman-Fried’s Alleged Crimes Have Real Victims (The Atlantic)
