The Future of ICOs and the Rise of STOs

On Yavin is the founder and CEO at Cointelligence, the data layer of the crypto economy. He has extensive experience as a serial entrepreneur and an angel investor, as well as more than 20 years of experience in the tech industry.  On uses his experience and knowledge of online marketing to create winning strategies for ICOs, crypto, and blockchain companies. On has a law degree (LLB) and is also a certified Advocate by the Israeli Bar Association.

Are ICOs dead? The ICO model or concept which fueled the crypto bull market of 2017 is pretty much dead, kaput, or whatever term we may choose to describe its demise. The crypto bear market that started last year made sure that the days of dodgy whitepapers and easy money are gone - and hopefully gone for good. Admittedly it was fun to some extent while it lasted. But nothing built on quicksand and empty promises can last for long. It was no different here and it was not good for the crypto market.

Now that hype and FOMO are pretty much gone, there are mostly serious investors left when it comes to the funding side. They are not impressed by sketchy attempts to draw their smart, hard-earned money into black holes never to be seen again. This has helped give rise to Security Token Offerings (STOs) which may be considered akin to Initial Public Offerings (IPOs). Yet, in more than one aspect, they are light years apart. Let’s discuss this and more.

ICOs vs STOs

What are ICOs? What are STOs? Let’s take a look at these two different ways of obtaining funding in the crypto market.

1. Initial Coin Offerings (ICOs) - Utility Tokens

ICOs issue utility tokens, tokens that offer no guaranteed rights to their holders beyond utility value (real or perceived). You don’t own or receive a stake in the project or the company behind the project itself - you don’t own any part of it. You are not an owner, merely a user or holder of a token that is supposed to be held for its utility value.

You have zero claim to the project’s profits and if the project fails for whatever reason - fraud or simple lack of adoption, you have little to no legal recourse. When that happens, you can at best claim ownership of a worthless utility token, call it a day, and move on.

On the other hand, ICOs are more decentralized than STOs: more people can participate than the case is with STOs. This can be both good and bad as many investors fail to do their own due diligence. They are driven by HYPE and FOMO. They jump in head-first at the first opportunity that arises, hoping to make a quick buck, and lose more than their shirts in the process.

2. Security Token Offerings (STOs) - Security Tokens

STOs issue asset-backed tokens or security tokens that ensure that you receive a stake or ownership in the project or the company behind the project itself. Security tokens also come with rights that are ensured by law. This is why STOs or the issuing of security tokens are subject to much more legal scrutiny than is the case for ICOs or the issuing of utility tokens.

This excludes ICOs that offer security tokens disguised as pure utility tokens. They are horses of a different color. They expose themselves and investors to unnecessary risk as they will run afoul of the law at some stage or another - and increasingly so as last year has shown.

The Future of ICOs - Hybrid Funding Models?

Are ICOs dead? Is there any hope of recovery? There is no doubt that the ICO model or concept that fueled the crypto bull market of 2017 is pretty much dead in the water. You will have more luck at this stage squeezing water out of a rock, than attempting to obtain funding for your project by falling back on the same ICO model deployed back then. This is not to say that all hope is lost. It is to say that we need to step up our game.

To obtain funding in current market conditions requires us to think outside of the box, to come up with better, more innovative funding solutions. This has given birth to hybrid funding models (e.g. Production-Oriented Token Sales) that contain elements of both ICOs and STOs without being classified as such in the purest sense.

It is still early days, too early to measure the success of hybrid funding models and proclaim victory. That being said, if ICOs survive, even if only in hybrid or altered forms - chances are that hybrid funding models will in all likelihood be the primary reasons for the survival of ICOs.

Given the nature of crypto and why it saw light in the first place, the push for decentralization will not disappear. Likewise, attempts to centralize the crypto market, through STOs and what not, are not going to disappear either.

Are ICOs dead? Will a balance be struck between decentralization and centralization? Only the passing of time will provide a definitive answer, but like it or not, the rise of STOs and hybrid funding is expected to accelerate in 2019.

U.S. SEC Needs More Time to Consider VanEck Bitcoin ETF Proposal, Invites Comments

The U.S. Securities and Exchange Commission (SEC) announced on Monday (May 20) that it needed more time to consider the VanEck–SolidX Bitcoin ETF proposal. This delay also gives interested parties more time to comment on the proposal and address the SEC's main concerns.

On 30 January 2019, Cboe BZX Exchange ("BZX") filed with the SEC a proposed rule change to list/trade shares of "SolidX Bitcoin Shares", which would be issued by the VanEck SolidX Bitcoin Trust. This proposed rule change was published in the Federal Register on 20 February 2019. It then had 45 days to approve, disapprove, or ask for a delay.

(Note, however, that BZX had filed its original proposal back in June 2018; the SEC delayed a decision on this proposal several times, and February 27 was the final deadline for the SEC to make a decision. However, due to the U.S. government shutdown that occurred in December 2018 and ended in January 2019, the SEC was partially out of action during this period. By the time that the SEC fully operational again, there was only a few weeks left till the final deadline. So, to give this Bitcoin ETF proposal the best chance of success, on 22 January 2019, BZX withdrew its original proposal, and re-applied (in order to reset the clock) on 30 January 2019.)

Anyway, on 29 March 2019, the SEC released a notice to say that it had selected 21 May 2019 as the date by which it should approve, disapprove, or ask for a further delay to consider the grounds for disapproving the Bitcoin ETF proposal. Why 21 May 2019? Because 90 days is the maximum amount of time it could ask for, and 21 May 2019 is 90 days from 20 February 2019, which was the date that the proposal got published in the Federal Register.

Well, yesterday (i.e. just one day before the expiry of the 90-day deadline), the SEC decided to delay making a decision, and this time it had to provide "notice of the grounds for disapproval under consideration" (i.e. explain why it thinks that it might deny the proposal).

Here are a few of the SEC's concerns, and it is inviting the ETF's sponsor, i.e. BZX, and other interested parties to provide written comments (in either electronic or paper form):

  • Has BZX "entered into a surveillance-sharing agreement with a regulated market of significant size related to bitcoin?"
  • What is the relationship between the Bitcoin futures market and the Bitcoin spot market?
  • The proposed Bitcoin ETF uses "a non-public, proprietary index to value holdings based on OTC activity", but is this really "an appropriate means to calculate the NAV of an exchange-traded product"?
  • BZX has said in its proposal that it "has entered into a comprehensive surveillance sharing agreement with the Gemini Exchange and is working to establish similar agreements with other bitcoin venues." But is the Gemini digital asset exchange "a regulated market of significant size"?

Any arguments regarding whether the proposal should be approved or disapproved need to be submitted within 21 days of publication in the Federal Register of yesterday's order (Release No. 34-85896; File No. SR-CboeBZX-2019-004), and anyone who wants to "file a rebuttal to any other person’s submission" must do so no later than within 35 days of the date of publication in the Federal Register.

The following tweets were sent out on May 19, i.e. the day before the SEC made this latest announcement, by Crypto Twitter's favorite U.S. attorney, Jake Chervinsky:

According to Chervinsky , "VanEck's new deadline is August 19," and the "SEC can & likely will delay one more time for a final deadline of October 18."

This is how Gabor Gurbacs , Director of Digital Assets Strategy at VanEck/MVIS, expressed his personal thoughts on the SEC's ultra cautious attitude towards Bitcoin ETFs:

The SEC choosing to delay making a decision on the VanEck Bitcoin ETF proposal did not come as a surprise to the crypto markets, which reacted very calmly (Bitcoin's price only went down slightly), and in fact, at press time (11:00 UTC on May 21), according to data from CryptoCompare , Bitcoin is trading at $7,945, up 0.33% in the past 24-hour period: