A new type of ICO platforms to propose feasibility study services to ICOs organizers and investors. The efficient RegTech solutions geared toward assisting start-ups with current regulation instead of traditional expensive and laborious processes
“RegTech: Technology that helps businesses comply with regulations efficiently and inexpensively.”
Crowdfunding platforms are rising
FinTech (financial technology) is an innovative wave that transforms the financial sector, dramatically enforcing the entry of new small investors, removing intermediaries, and simplifying all financial processes. Assets recording in a blockchain, digital lending, assets’ tokenization, and its purchasing with the use of cryptocurrencies are the key directions of the FinTech wave, but crowdfunding/ICO (Initial Coin Offering) is the essence of the global finance system’s digital disruption.
The Deloitte’s report “Beyond Fintech: A pragmatic assessment of disruptive potential in financial services” (the World Economic Forum) positions digital platforms as the primary means of distributing FinTech products and services. The rising PropTech platforms become the dominate model of the real estate finance system, providing information for buyers and sellers, facilitating transactions, and managing the real estate crowdfunding campaigns. Demand for PropTech services will grow steadily because four out of ten businesses in the next three years will undergo a complete digital transformation from start-ups, and new platforms will be their primary service providers.
RegTech gears FinTech to drive the real economy
First crowdfunding platforms had been created by IT/cryptocurrency enthusiasts. None of them provides businesses with a magical key to disruption. No doubt, they create new opportunities for the operators to raise finance, and substitute traditional investment processes with new ones – more transparent, with wider accessibility for private investors, and with lower transaction costs. But to promote new FinTech business models, start-ups have to link it to the real ecosystem. In other words, they need some kind of a “gearbox,” aligning the financial system with the real economy (as it proposed in the UNEP report “Fintech and Sustainable Development”). Such gearbox ensures the coordinated work of four gearwheels (see the figure above): where the left lower gearwheel is the social environment, the left upper gearwheel – the RegTech (regulatory technology) system, the right upper gearwheel – the FinTech infrastructure, and the right lower gearwheel - economic resources.
The disruptive wave impacts first the social environment as a result of the growing social demand for the decentralization of the financial system, and an easy access for new players; increasing transparency, accountability, and information sharing. The FinTech infrastructure including banks and credit organizations, internal and transboundary payment systems, asset management services, cryptocurrencies and crowdfunding businesses respond to the request in the best interests of society. The RegTech system embraces legislation, industry standards and regulations, compliance tools, risk management, KYC (Know Your Client) and AML/CTF (Anti-Money Laundering and Counter-Terrorism Financing) mechanisms. Agility and lower costs through improved efficiency and speed are the distinguishing characteristics of RegTech, making it different from the old regulatory system. But the RegTech gearwheel rotates with a lag from the social environment and the FinTech infrastructure wheels, creating temporally an unprecedented before access to the new source of capital.
The gearwheel of economic resources, including labor, capital (fixed and working), and the production system is the most inertial part of the gearbox. In the public interest, the rotation of the gearwheel of economic resources is strongly dependent on the rotation of the RegTech gearwheel. It should be theoretically, but in fact, the invention of cryptocurrencies and the temporary lag of RegTech derived a phenomenon of the ICO (Initial Coin Offering) as an extremely simplifying procedure of IPO (Initial Public Offering). In this way, ICOs became an easily accessible substitute of traditional sources of capital.
The main trends of ICOs in 2018: the beginning of the new era
According to the experts, the total amount of funds raised via ICOs is approaching US$4 billion, twice the volume of venture capital investments in blockchain projects. Approximately 90% of all ICO projects are fictions and will be closed, while only 3% of a thousand launched projects moved from POC (Prove of Concept) stage to the implementation stage. Most of ICO white papers lack a clear explanation of any real business application. The investors realized that they are losing their money in fake or simply insufficiently grounded ICOs that have little to no due diligence. The term ICO itself has become a synonym for an excessive risk and hype.
In 2018 the situation has changed. The Deloitte’s report noted that in 2017 the emphasis in ICOs was on marketing, while in 2018 the main effort will be focused to comply with regulatory requirements and financial justification for investors. Stefan Thomas, a creator of Ripple, in his interview with CoinDeck, stated that while 2017 was the year of independent speculators in the ICO market, in 2018 many institutional players will enter the market, including investment and pension funds, payment operators and other financial institutions. Accordingly, the project estimation from the investor's point of view begins to be valued in the market. Participating in the ICO, venture funds will bring to this market traditions and tools of due diligence to assess the legitimacy of projects and the reliability of their initiators, as well as the feasibility study of ICO projects.
The cryptocurrency market will continue to grow due to the institutional capital injections and professional investors’ penetration into ICO market. In 2017, 84 new crypto funds were launched, and in 2018 there will be more crypto funds with an estimated US$2billion in assets under management. The growing cryptocurrency market with a multitude of ICOs that about to start needs appropriate platforms to facilitate the investment process.
New type platforms are getting into gear
In 2017 and before, ICO projects usually used several existing blockchain platforms to run campaigns. Waves and Ethereum were the most popular technical platforms that issue crypto tokens within the development stage of the ICOs, and then serve the investment process. In 2018, RegTech has entered into force according to new demand for projects’ transparency, measured risks, security, and investors’ protection. New type platforms such as CoinList, Balanc3, and TransFinanceSolutions appeared to propose due diligence and feasibility study services both to ICOs organizers and investors. New type operators follow local regulations and cooperate with regulators from other jurisdictions because ICOs become really international.
Nowadays, to be legitimate ICO’s initiators have to use transparent legal structures, show that their crypto tokens are the utility tokens indeed (not financial tools like shares), and protect the investor rights until tokens can be used to pay for promised services or products. The new platforms provide private and institutional clients with a complete set of services, including:
- Evaluating projects and verifying them for compliance with the regulator’s requirements, the investors’ protection, and AML / CTF measures.
- Checking a real value of projects, taking into account all its facets.
- Giving investors an access to tools for due diligence procedures and feasibility study calculations.
- Protecting the ICOs organizers’ intellectual properties.
- Providing the clear justification of project risks.
- Protecting investors’ interests and making their funds secured.
- Ensuring that participants from different jurisdictions are brought into line with the ICO legal framework, taking into account the specific legal systems (common law - Australia, New Zealand, USA, Great Britain; rights based on the Civil Code - countries of Western Europe, South America, Africa and Russia).
- Planning the whole funding process, including a third party (escrow) services to keep cryptocurrency, and the exchange of cryptocurrencies for fiat money.
- Keeping reporting procedures standardized and simple.
It should be pointed out that any single platform is not able to provide all the above-mentioned services, but several cooperating platforms located in jurisdictions with the most favorable RegTech can do it. Such jurisdiction has to have a well-developed FinTech infrastructure and appropriate economic resources. Talking metaphorically, all four gearwheels here are in a good enough position, and the cooperating platforms align them to start-up disruptive projects, forming a new ecosystem. In practice, this metaphor means the thorough screening of projects and amending its white papers and roadmaps, as well as the software to ensure the project implementation. It is the only way to bring new generation blockchain projects to life. And RegTech cannot be seen as a mere compliance and reporting tool, it is much broader, being an important part of lean business models.
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