In 2017,a total of $4.6bn was raised globally through initial coin offerings (ICOs), up from $0.2bn in 2016.
This is according to a recent report by PwC's consulting division Strategy&, which provides a comprehensive overview of ICO activity globally and insight into emerging regulatory developments, and also looks at what the future holds for ICOs.
The report found that ICOs are evolving to a more robust model, challenging the venture capital (VC) model, and provide a third option for young companies to raise finance, after taking on debt or selling equity.
An ICO is a term describing a limited period in which a company sells a predefined number of digital tokens (crypto coins) to the public in exchange for major crypto-currencies, mostly Bitcoin and Ether.
"ICOs took off in 2017 as a means used by blockchain-based start-ups to raise funding. In October and November 2017 alone, five ICOs - totalling $494 million - were among the top 15 token sales to date. The best ICOs are looking to a 'hybrid model' that brings the best of VC and ICO funding. The benefits of having VCs on board to support the business are combined with the fundraising opportunity of the ICO, and also the ability to use the process to create a community around a project, in a similar way to traditional crowdfunding," notes the study.
The report further describes upcoming trends for those doing ICOs, emphasising governance, strong anti-money laundering, more of a focus on cyber security, and other structures to reassure regulators and investors.
Paul Mitchell, Fin Tech Leader at PwC SA, explains: "The ICO is the second big disruptive model to come from the blockchain after Bitcoin, enabling decentralised fundraising, but there are not yet many clear regulations in this area. The best businesses are structuring their ICOs carefully to avoid regulatory and other pitfalls."
In the future, PwC expects ICOs to have more of an institutional mindset and to work with top-tier advisors and partners. Fundraising, according to the report, may become harder as investors choose to sit on the sidelines after recent issues and uncertainty, although stronger models may start to attract more institutional investors into this space.
Global blockchain service provider WIZZLE recently announced that it is courting South African investors with its EUR30 million (R441 million) ICO.
In an interview with ITWeb, Mark Noorlander, CEO of WIZZLE, said the primary goal of the ICO is to create a global blockchain with a local presence. For this ICO, WIZZLE plans to work with South African operators to ensure locals also have access.
Last month, local betting blockchain start-up Gron Digital, unveiled its pre-ICO.
The start-up says its ICO intends to raise an equivalent of 57 000 Ethereum coins (valued at around $57.4 million), which will be allocated to software development, operations, advisors, marketing, legal fees and contingencies.
ICO regulations
Globally ICOs are largely unregulated and some jurisdictions are reacting either by seeking to find the right legislative approach, e.g. Switzerland, Hong Kong, Singapore, Mauritius; while others are more concerned about all the implications and have intervened actively, such as the US and China. Since ICOs are by their nature decentralised, companies have tended to seek out the more favourable jurisdictions, driving activity in places like "Crypto Valley" in Switzerland and in Hong Kong and Singapore, according to PwC.
Regulators globally have raised the alarm over crypto-currencies, saying the technology may aid money laundering and terrorist financing, hurt consumers and undermine trust in the global financial system.
Last week, many South Africans reportedly fell prey to a Bitcoin scam which resulted in losses of over $50 million (R593 million).
According to a Times Live report, more than 27 500 people, including South Africans, Americans and Australians, have been duped in one of the biggest Bitcoin scams to hit SA, after binary trading platform BTC Global promised to give investors "unmatched returns" and easy profits. It transferred Bitcoins into an online wallet address.
The Chinese government on 4 September banned ICOs and ordered some crypto-currency exchanges to shut. Over 15 exchanges, including the country's three largest players OkCoin, Huobi and BTCChina, closed their mainland businesses.
US lawmakers are also moving to consider new rules that could impose stricter federal oversight on cryptocurrency, Reuters reports.
France and Germany want crypto-currencies on the agenda for the upcoming G20 meeting of the largest advanced and developing economies.
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