The major premise of ICOs
What do ICOs destroy? I have declared that I will stop talking about this in public, so I had put down what I always used to say when I had the opportunity to talk in public in a written document.
Many people understand ICOs to be an easy method of fundraising. I think this is because their full name is “Initial Coin Offering” a name similar to IPO. However, the more that one gains a correct understanding of the actual state of ICOs, the more one realizes that what ICOs have changed is not the ease of amassing funds.
What ICOs have changed is the ease of providing funds. First of all, this is the major premise.
The difference between ICOs and IPOs
ICOs seem from their names to be close to IPOs, but in fact, they are equivalent to the seed funding for startups, or to series A funding. It is not the method by which a company which is making a profit, or whose success is partially assured, sells stocks publicly to attempt something new, as is the case with IPOs. An ICO takes the form of a company whose future is still unknown, which is about to begin its attempt, and declares that it will do its best as it recruits supporters.
The unique characteristic of ICOs is that fundraising takes place while the company and the product are still at an extremely early stage. Until now, funding was provided at this stage by angel investors, highly experienced business managers, or professional venture capitalists. These people had the expertise and knew what kinds of products would succeed. Taking a strategy of concentrating investments in places where a certain degree of success could be anticipated, rather than investing small amounts indiscriminately in a large number of companies, they enabled the venture capital and venture investment industries to grow over time.
What ICOs have changed is the environment for investors
However, ICOs have made it all too easy for anyone to invest. The situation is as though the whole human race had become angel investors. The fact that even people who are no better than amateurs, without any experience of due diligence, have been enabled to invest can be said, in a sense, to have brought about a frightening, destructive change.
Until now, professionals who understood business theory properly, understood the products, had experience and could judge which way the world was going to go invested sizable sums of several dollars or cents. Now, however, change is taking place enabling ordinary people to invest even small amounts. If this is the case, it is necessary to bear in mind the “lack of understanding” of financial knowledge and startup businesses on the part of investors when thinking about ICOs.
I will give an example.
Let us imagine that a child who has lost his family or his siblings in a war is crying in front of our eyes. Now let us suppose that he says to us, “I want to make the world better to prevent this kind of thing from happening again, so I want to collect funds.” Or let us suppose that he collects funds telling us, “It is too hard for me to live at the moment, so I want money to buy food.”
How many people would actually be able to give that child one million dollars right there on the spot? No particular return can be expected. We do not know much about how the money will be spent. I think that there are very few people who would be able to give a large amount of money in that situation.
However, even if there was nobody who would give one million dollars, some people might be willing to give one dollar. Almost certainly, there would be some such people. But as long as fiat currencies are used, it incurs overseas remittance fees or commission on currency exchanges, making remittances of a few dollars or less unrealistic. Where cryptocurrencies are used, though, remittances of a few dollars or less become a reality. Even if getting one million dollars from one person is impossible, it may be feasible to get one dollar each from one million people. In other words, it is possible to give money even without possessing a large sum.
This is the great potential of ICOs.
ICOs merge funding and donations
ICOs merge the words “funding” and “donation.” Until now, according to common understanding, donations involved giving a small amount and saying, “Now do your best.” On the other hand, funding meant handing over money with the expectation of some kind of return.
At this point, ICOs came onto the scene.
It became possible to send a small sum of cryptocurrency, too small to expect a return. At the same time, money sent using cryptocurrency is recorded forever on the blockchain, so it is technically possible to give back a return. In other words, it is possible that the small amount of money entrusted now may come back as a return in several generations’ time.
Continuing with the example I used earlier, it is possible that the war orphan in front of you whom you helped could found a major enterprise which goes on to help rebuild the country, and could realistically send back a return to the grandchildren of the people who gave the person money. Moreover, there is no reason why this return should be financial. It is highly probable that it would be some kind of right. This is a new economic sphere based on tokens.
What ICOs destroy
I will repeat: ICOs have merged funding and donations.
ICOs have destroyed the two concepts of funding and donations, creating a new flow of money. Money flows to things which are true of value to our society, things which are right. When you donate 10 cents, do you expect a return? Have you not donated money in the hope that by supporting an organization or individual, the world as a whole, or that field, would become a better place?
A method of amassing funds with no clear expectation of repayment of the kind associated with funding will expand such potential much further from now on. When thought about in this way, it can be expected that money will be amassed not by projects which “will make a lot of money by the time the accounts are balanced this year” or “will produce more dividends this year,” but by those which people truly believe to be right, or which they believe will make the world a better place.
In the forthcoming world, an era is approaching in which that which is meaningful or right will be acknowledged as valuable, and funds will be gathered based on a wish to support such things. In the past era, the question of investors to entrepreneurs was perhaps, “How much money can be made?” However, from now on, the question the whole world over will be, “How much better can you make the world?”
What ICOs will destroy is the conventional concept of economic value itself.