How could the Crypto World be transformed by loyalty programs?

What exactly are the opportunities from the Crypto World depend on the main interest(s) of the person with whom you are speaking. Bitcoin’s fame has highlighted the potential for (near-) anonymity and privacy in the holding and transfer of wealth. The rise the number of in initial coin offerings (ICOs) over the last year or so shows how Venture Capital (VC) entrepreneurs see the Crypto World as a useful source of funding for new and innovative businesses. Several observers have remarked on how crypto-coins can be used to build communities of like minded people.

As of mid-2018, though, the reality has yet to catch up with the potential.  The limited data that is available suggests that the number of active crypto-wallets globally has risen over the last 18 months from about 10mn to 24mn [1]. Although the rate of growth has been phenomenal, the number of wallets remains tiny in the context of the global population of about 7.6 billion. An obvious question is: what will cause the Crypto World to move to the mainstream?

Two conditions need to be met for the Crypto World to become a part of the everyday life of most people on the planet. The first is that the Crypto World can clearly provide really good solutions to problems. Really good in this context means that the solutions are not available - or far less efficient - elsewhere.

For instance, there has been a lot of excitement about the potential for the Crypto World to provide low cost payments services across national borders. This could be particularly helpful for people who are working in foreign countries who want to remit funds to their families and friends at home in poor countries (e.g. Indians and Filipinos working in the Middle East or people from Central America working in the United States). However, the improvements in payments services that are being made by conventional banks, money remittance companies and FinTechs are enormous. By the end of 2018, the European Union’s TARGET Instant Payment Settlement (TIPS) system should make it possible to pay someone in no more than 10 seconds for a cost of 0.2 euro cents. [2] The Crypto World may not be needed at all to provide cheap and fast cross-border payments. Fortunately, there are many other useful things that the Crypto World can do.

The second condition that needs to be met is that the Crypto World needs to be trusted. In this context, this means that people who buy and trade crypto-coins understand and trust the crypto-coins. The issuer of a crypto-coin can and should clearly identify what are the risks attached. Of course, the risks that are attached to any one crypto-coin can be laid off by holding a portfolio of crypto-coins. 

Trust in the Crypto World also means that the crypto-exchange through which a crypto-coin is bought or sold is trusted. Building trust in a crypto-exchange is helped by:

·       SIZE AND VARIETY. The greater the trading volumes and the variety of crypto-coins, the more stable and more profitable will be the crypto-exchange

·       DIVERSITY OF TRADERS. The more varied are the traders, the more likely it is that there will be willing buyers and willing sellers at any one time

·       COMMUNITY AND EDUCATION The greater the incentive for people to visit the website of the crypto-exchange, the more likely it is that they will become traders.

·       REGULATION Ideally, a crypto-exchange will clearly be overseen by a first-class regulator. At the very least, there should be evidence of dialogue between the crypto-exchange and the regulator which indicates that the crypto-exchange complies with the spirit of existing rules and regulations.

A separate blog post [Questions of Loyalty – I] explains how loyalty programs could be transformed by the Crypto World. Worldwide, many airlines offer frequent flyer programs, where loyalty points can be redeemed for plane tickets. Many retailers offer discounts or other benefits to regular customers who are members of their loyalty programs. Hotel chains reward regular guests with discounted accommodation. There are plenty of other examples.

Loyalty programs are very similar to crypto-coins in some important ways. Both are bundles of rights. The rights are passed by the company running the loyalty program or the issuer of the crypto-coin to the loyalty program member or the holder of the crypto-coin.

Where loyalty programs differ from crypto-coins is that it is normally difficult or impossible for someone who holds loyalty points to transfer those points or to sell them to another person (except, perhaps, an immediate family member). In most cases, there is no ready market for loyalty points, which means that it can be very difficult to work out what the loyalty points are actually worth. From the point of view of the member of the loyalty program, these can be important disadvantages.

However, these constraints would not apply to a loyalty program if it were based on a crypto-coin which is traded on a trusted crypto-exchange. A loyalty program member could redeem his/her crypto-coins for benefits, or he/she could sell the crypto-coins to another person. It may be that the enterprise running the loyalty program would restrict the market for crypto-coins to existing members of the program. Or it could be that the crypto-coins could be sold to anyone. 

Any large retailer, hotel company or airline that chose to run a loyalty program on the basis of a crypto-coin that is traded through a crypto-exchange would be making an important statement. It would be giving its vote of approval to the crypto-exchange(s) through which the crypto-coin can be traded. It would clearly be supporting the general principle that loyalty points can be exchanged for cash or another crypto-coin instead of being redeemed.

The impact on the Crypto World would also be huge. All existing members of the loyalty program would have a strong incentive to sign up with the crypto-exchange. The loyalty program would give large numbers of people a reason to engage with crypto-coins on a day-to-day basis for the first time. As more and more loyalty programs followed suit, the transparency and opportunities for program members would grow further. 

Ultimately, loyalty programs and loyalty program members could be the main drivers of growth of particular crypto-exchanges – or, indeed, the Crypto World as a whole. Given the numbers of people worldwide who are members of loyalty programs, program members could become the overwhelming majority of people who are trading crypto-coins. That would definitely change conventional views of crypto-exchanges. It would definitely bring the Crypto World into the mainstream.

[1] Dr Garrick Hileman and Michel Rauchs, Judge Business School, University of Cambridge, Global Cryptocurrency Benchmarking Study, 2017; Statista (May 2018).

[2]Yves Mersch, European Central Bank (ECB), Virtual or virtueless? The evolution of money in the digital age, 8 February 2018

How could loyalty programmes be transformed by the crypto world?

The idea that people who are customers of a retailer or another business-to-consumer (B2C) enterprise should be rewarded for their loyalty is not new. Founded in Michigan in 1896, the Sperry and Hutchinson (S&H) Company distributed stamps and stamp books to merchants. The merchants would then give S&H Green Stamps to customers to reward them for timely payment and/or for loyalty. When full, books of stamps could be redeemed by the customers for goods at designated outlets or from catalogues. Other retailers followed S&H’s example and launched their own loyalty programmes based on stamps.

Today, the number of people worldwide who have access to loyalty programmes can be numbered in the billions. The OECD club of (mostly) rich countries alone have a total population of about 1.3 billion. Many more live in populous countries such as China, India, Indonesia and Brazil. Loyalty programmes themselves have spread far beyond retailers; to airlines, hotel operators and many other businesses. Increasing and ever cheaper computer power has made them easier to establish and operate. In addition, they provide valuable commercial intelligence to the businesses that run them - such as details of who is buying what.

Loyalty programmes have flourished, even though normally there are significant constraints on the benefits that they confer on their members. Loyalty points may sometimes be transferred to other family members, but very rarely to other people. If the loyalty programme is run by a non-retailer, the points can usually only be redeemed for the goods or services that are provided by the business in question. Often there are restrictions on where and when they can be redeemed. Sometimes, the monetary value of the loyalty points to the member will be minimal. 

It is sometimes quite difficult to quantify the monetary value of the loyalty points. Suppose you earn a lot of frequent flyer points with your preferred airline by flying around the world. Over the next year, you earn more frequent flyer points through a number of shorter distance flights. About 12 months later, you have just accumulated enough points for a return trip from your home city to X. However, at that time, cut-throat competition in the airline industry means that you can travel to X and back for far less than you could have imagined a year previously, but with another carrier. Do you redeem your frequent flyer points - which means that they are worth about the same as the new and low airfare to X and back? Alternatively, do you hold on to the points in the hope that you can redeem them for a journey that would otherwise be a lot more expensive than a return trip to X?

The loyalty that the business should generate from the programme will depend on the perceptions of the customers who receive the loyalty points. The customers’ loyalty is likely to be greater if they think that they are getting a really good deal from the loyalty programme. In the end, though, the customers have little direct input. The terms of the loyalty programme are set and controlled by the business.

Loyalty points have quite a lot in common with crypto-coins. They are bundles of rights that are passed by the issuer (the company running the programme) to the holder (the customer). They are not, and should never be considered as money. They only act as a medium of exchange to a limited extent (given the constraints listed above). They may act as a store of value, but are unlikely to do so over the long-term. They are never used as a unit of account.

Of course, loyalty points are not crypto-coins. The records of which loyalty points belong to whom are kept on centralised systems, which are operated by the company that is running the loyalty programme. The records are not held on blockchains - a series of decentralised ledgers which are updated simultaneously. Most importantly, loyalty points are not traded on any exchange. If you have more loyalty points than you want, there is no easy way of selling them to someone who is a willing buyer.

This could all change. For example, a retailer which based its loyalty programme on a crypto-coin that could be traded through a crypto-exchange by its customers would achieve a number of advantages, even if the loyalty crypto-coins could not be traded with non-customers. There would be much greater transparency in relation to the value of loyalty points. This would be true even if the customers were only able to trade the loyalty crypto-coins for other crypto-coins, and not directly for fiat currencies. Far fewer loyalty points would be wasted. The retailer would get valuable insights about which are the customers for whom the loyalty programme is most important: these would be the people who tended to buy large numbers of crypto-coins in order to redeem them.

There is no reason why the retailer in this example should limit the new programme to customers. It could be opened to non-customers, who would then redeem the loyalty crypto-coins with the retailer – and, in effect, become customers. The retailer could open the programme so that it is possible for the crypto-coins to be redeemed for goods and services (such as travel and accommodation) that the retailer would not normally sell. The greater the choices available to people, the more likely it will be that they will buy the loyalty crypto-coin. The greater the number of people in the community of buyers of the loyalty crypto-coin, the more likely it is that other suppliers of goods and services will become involved.

A well-run crypto-exchange should have much in common with a well-run street market. What should you look for?

Transparent and fair prices.  In most cities where they can be found, street markets are well known by local people for the low prices and high quality of the produce that the stallholders offer. Regardless of what you may be looking for – fruit, vegetables, meats, fish, cheeses and/or much else besides – it is almost always on offer from more than one stall. The competition means that all stallholders have to offer a fair deal to customers like you. If the crypto-coin that you want is traded on more than one crypto-exchange, do some homework to ensure that you are not paying above the odds as a buyer. If the crypto-coin that you want is only traded on the one exchange, be sure that you can rationalise the price that you are paying.

Best execution. Execution is simple in a street market. You agree to buy something at the prevailing price, make payment (with stallholders preferring cash to cards in many places) and take delivery. If you are buying a crypto-coin through a crypto-exchange, you should ensure that the price at which you are buying is fair relative to the prices at which other people are buying the same crypto-coin at about that time. If the price of the crypto-coin rises sharply at the time that you are buying, the implication is that the market is illiquid or that, for some other reason, you are not getting best execution. 

Payment against delivery. As noted above, ownership of goods changes in a street market at the moment that you make payment. In the Crypto World, there may be a delay between the time that you pay for a crypto-coin in an Initial Coin Offering (ICO) and the time that you have the ability to do what you wish with the crypto-coin. If you are buying an existing coin, though, you should have control of it from the moment that payment is made.

Custody. A street market generally does not provide custody services. Once a customer has made a purchase, he/she is responsible for the safekeeping of the goods. Fresh foodstuffs that are not consumed immediately are preserved in the fridge. Some crypto-exchanges do not provide custody services. Once you have bought a crypto-coin, you are responsible for keeping it safe – ideally in a cold wallet. If, however, the crypto-exchange that you are dealing with does hold your crypto-coins for you, you should ensure that you will be compensated for any losses due to theft by hackers.

Accessibility. Street market stallholders typically work long hours, and often over six days a week, in order to provide you, and the other customers, with the convenience that you need. In most places, street markets are easily accessed by public transport. A crypto-exchange should be accessible by Internet from anywhere in the world on a 24/7 basis.

Variety. Some street markets specialize in just vegetables; others, in meat or fish. In many street markets, though, you can find dozens of stalls, which offer a bewildering variety of fresh produce, other foodstuffs, clothing, leathergoods and much more. The street market as a whole can therefore serve as your ‘one stop shop’. The greater the number of people who come to the market, the greater the opportunities for each of the stallholders. The same is true of crypto-exchanges. A crypto-exchange where fewer than 10 crypto-currencies are actively traded is much less attractive than, say, one where 50 or more are traded.

Globality. Street markets are very much In Real Life. They are associated with particular cities and communities. The stallholders are locals. Because much of the produce that is being sold is perishable, and is consumed shortly after sale, it usually comes from farms that are nearby. Nevertheless, in larger and more varied street markets, some of the stallholders will offer exotic foods and other goods that come from around the world. The greater the diversity of sources, the easier it will be for you to find exactly what you might want. A crypto-exchange should be able to accommodate ICOs from many countries, and clearly attract investors and traders from around the world.

Regulation. Most street markets are subject in some way to regulation by the city council and the health authorities. If stallholders are dealing in fresh produce, the market place will have to be kept clean. For these reasons, the areas in which street markets can operate are usually clearly marked. Often there will be a very obvious police presence – to ensure security and tranquility in places that can become very crowded. Overall, there will be an atmosphere of trust. The stallholders will trust each other and the customers that they serve. The customers will trust the stallholders. Ideally, a crypto-exchange will be overseen by a well-respected regulator. The greater the trust in the crypto-exchange, the more likely it is that people will deal through it. A crypto-exchange that is not formally regulated should at least show that it maintains the same standards and procedures as one that is so regulated.

Community. This is perhaps the most important feature of a street market. A successful street market is based around a strong sense of community. In many places, people will live in, around and above the street market. Many of the stallholders will have had a presence for years (or generations) and will look out for each other. Having to work year-round and in any weather conditions, the stallholders are seriously committed to the life and community of the market. Whether or not there is an organization that actually markets the street market, it will be well known within its own city. Often there will be good reasons for you to go to the street market even if you do not want to buy anything. You may want to go to a restaurant or café that is next to the street market – or you may just want to go to enjoy the atmosphere. A good crypto-exchange is one which clearly makes efforts to develop and promote a community through education, marketing and much more. You should want to engage with the crypto-exchange even if you are not actively looking to buy or sell crypto-coins.

Look to a street market, rather than to a stockmarket, for the answers

When you buy a crypto-coin, you have to consider two issues. Is the crypto-coin right for you at the price that you are paying for it? Is the crypto-exchange you plan to deal through adequate for your needs?

The second question is as important as the first. There is no point in doing a deal unless you are going to get all the advantages of dealing through a well-run crypto-exchange. And there is no point in doing a deal if you are going to be exposed to the disadvantages of a badly-run exchange.

Anyone who lives in the English-speaking world might assume that a well-run stockmarket would provide a good model for a well-run crypto-exchange. However, there are several problems with this. 

One is that the English-speaking world has a (much) stronger tradition of investing in stocks than other parts of the world. For now, the Crypto World appears to be growing most rapidly in a number of Asian countries that do not speak English. Although there are large and liquid stockmarkets in each of China, Hong Kong, Taiwan, Japan and South Korea, they are different in important respects from stockmarkets in the English-speaking world (and from each other).

Another, more fundamental, problem is that crypto-coins are much more varied than the stocks and bonds which are traded on stockmarkets. Some crypto-coins undoubtedly have many of the characteristics of securities. Securities regulators around the world have had quite a lot to say – and rightly so – about Initial Coin Offerings (ICOs). However, a lot of crypto-coins are not conceived as securities and should be of no interest to securities regulators.

In addition, crypto-exchanges are structured quite differently from stockmarkets. If you take part in an ICO, you will typically deal with the entrepreneurs who are organizing the deal. If you buy or sell a crypto-coin in the secondary market, your order is matched with that of another individual investor.  If, on the other hand, you want to take part in an initial public offering (IPO) of securities that are to be listed on a stockmarket, you will probably deal with a stockbroker. If you want to trade in securities that already exist, you will have to deal with a stockbroker.

In fact, a crypto-exchange is much more like a street market, where you can go to different stalls to buy the fruit, vegetables, meat, fish, cooked food, exotic foodstuffs and much more. This variety – in this case, of the crypto-coins which can be traded – is something that a street market has in common with a crypto-exchange.

In addition, street markets are ubiquitous. Street markets can be found everywhere and, in some places, play a key role in the cities that they serve. They are generally well run, because they have to be. A badly run stock exchange will, in most countries, only affect a relatively small number of people who are wealthy enough to invest. A badly run street market can affect just about everyone in that city.

Like a crypto-exchange, a street market is peer-to-peer in that it connects you with individual people who are on the other side of your transaction(s). Unlike in a stockmarket, there are no intermediaries or brokers. If you want to buy something, you go to a stall, pay money and take delivery. On the other side of the deal, the stallholder owns whatever it is you want until the moment that money changes hands. 

Sometimes the stallholder will have bought the merchandise from a wholesaler. Sometimes, he/she will also be a farmer who has produced the food him/herself. If this is the case, his/her position is conceptually similar to that of an enterprise that organizes an IPO and sells you a new crypto-coin through a crypto-exchange.

There are some differences between a street market and a crypto-exchange, of course. One is that a street market has a physical location which is important to the people who use it. Another is that what you buy at a street market is typically for consumption in the near future. There is no expectation that you will try to sell whatever it is that you have bought back to the stallholder, or another stallholder. In a crypto-exchange, on the other hand, there is usually the facility for you to sell the crypto-coin that you have bought.

Prior to mid-2017, new and innovative companies raised virtually no money from the Crypto World. Now, Initial Coin Offerings (ICOs) are becoming mainstream. What could cause the ICO phenomenon to grow by another order of magnitude?

In its ‘Venture Pulse’ review of the global Venture Capital (VC) landscape for 1Q18, global consultant KPMG noted that ICOs have ‘become more mainstream’ as a source of funding for start-up companies. This has been partly because the regulators in some countries - such as Japan and Switzerland - have supported ICOs. It is also because ICOs are widely regarded as being far easier to undertake than Initial Public Offerings (IPOs) through conventional stock markets.

There has indeed been an explosion in funding through ICOs. Coindesk’s ICO Tracker data indicates that there were usually only one or two ICOs per month globally, and never more than eight, through the three years to the end of 2016. There have been at least 50 per month since October 2017, and 78 in December last year alone. Prior to mid-2017, the norm was for less than US$15mn to be raised through ICOs each month. Some US$1,442mn was raised in December last year, followed by US$1,790mn in January, US$2,382mn in February and US$2,158mn in March.

Although some of these most recent numbers may have been inflated by private placements of crypto-coins to investors, the Crypto World has acquired a scale where it really could have an impact on VC markets - especially in relation to the funding of start-up companies. By way of comparison, KPMG noted in its report that ‘first time’ (i.e. mostly start-up) companies raised around US$3,000mn through 1Q18 in 635 deals.

The surge in activity in the Crypto World is even more extraordinary when you consider the eco-system on which it is based - or the lack of it. Most of the 200 or so crypto-exchanges are new, offer only a limited number of crypto-coins, and are not well equipped to handle ICOs. Worse, they generally serve investors in only one country and often operate in a regulatory grey zone. 

For all these reasons, there have not really been properly organised communities of investors. The activity that has taken place has overwhelmingly been due to first-time investors (or speculators) going to the crypto-exchanges, rather than being attracted to them. There are undoubtedly plenty of Crypto-VC entrepreneurs. However, they do not constitute an established community, linking scientists, innovators and financiers, like the cluster in the United States’ Silicon Valley.

Now, imagine what could happen if someone could address these problems simultaneously - producing a Crypto World with efficient and regulated exchanges, informed retail investors and proper clusters of Crypto-VC entrepreneurs…

What are property rights and why do they matter in the Crypto World?

The taming of the Wild West of the United States took a long time and, in some ways, was a complex process. At the heart of the process, though, was a simple concept. That concept was that the property rights of people who lived and worked in what had previously been a fairly lawless place would be protected. A person who could demonstrate ownership of a farm or a horse, say, could have some redress and restitution if these were taken away illegally.

Since then, the definition and protection of property rights has been a key element wherever any developing country or territory has sustained enough growth over the medium term to become relatively rich by the standards of the rest of the world.

In a review entitled ‘Best Practices for Token Sales’, which was published in December 2017, the Fintech Association of Hong Kong (FAHK) noted that an important characteristic of crypto-coins is that they include ‘bundles of rights’ for the holders. What makes them different to other things that include ‘bundles of rights’ (e.g. shares or bonds that are traded on a conventional stock exchange) is that the records of the rights and the holders are stored on blockchains.

The FAHK argues that a crypto-coin is defined by the property rights that it confers. Possibilities include:

  • Share/proprietary right. This is where a crypto-coin confers on the holder a share or other proprietary right in a company or property.

  • Membership right. This is where the holder is able to access a product or service as a result of his/her ownership of the crypto-coin.

  • Profit right. In this case, the holder of the crypto-coin benefits from the profits or the revenues of the enterprise. He/she is essentially a Joint Venture partner, but may not have the same rights as the actual owners of the enterprise.

  • Derivative interest. This is where the crypto-coin gives entitlements or includes other features that are determined with reference to something that is unknown and/or fluctuating.

  • Contribution right. In this case, the holder of the crypto-coin has the ability to play some role in developing and/or maintaining the product or service of the enterprise in question.

  • Governance right. This right enables the holder of the crypto-coin to influence the governance of the enterprise (e.g. by having the ability to vote in elections of board members).

  • Payment/ medium of exchange right. This is the ability of the holder of the crypto-coin to use it to pay (or to be paid) for goods and services.

  • Other right. There are many other possibilities. In a situation where a crypto-coin has many of the characteristics of a bond that is traded in conventional markets, for instance, the right may be to receive the repayment of the principal.

Using this approach, Bitcoin would for example be seen as a bundle of three rights. First, a proprietary right is conferred on anyone who mines the crypto-coin or who buys it in the secondary market. Through the records on the underlying blockchain, the Bitcoin demonstrably belongs to him/her. Second, a payment/ medium of exchange right is conferred in that there is some potential for a holder to pay for goods and services with Bitcoin (or be paid in it). Third, there is a derivative interest. The price for which Bitcoin may be sold through a crypto-exchange is determined by market forces.

The terms of the Initial Public Offering (IPO) will show how, where and for how long the bundle of rights attaching to the crypto-coin may be traded through one or more crypto-exchanges.

Exactly what are the rights that are conferred to holders of a particular crypto-coin really matter. They may be very similar to the rights that are conferred to investors in securities that are sold in a conventional Initial Public Offering (IPO). Alternatively, they may be very different indeed.

If an entrepreneur who is considering the creation of a new crypto-coin by way of an ICO cannot explain very briefly and clearly what are the property rights that are bundled into the crypto-coin, the deal is unlikely to be successful. 

You have heard good things about an Initial Coin Offering (ICO). What are the right questions to ask?

In late 2017, most people who had any interest in the Crypto World were focusing on the extraordinary surge in the price of Bitcoin and the rise in the trading volumes of crypto-exchanges globally. 

Meanwhile, the Fintech Association of Hong Kong (FAHK) was looking at the Crypto World from the point of view of Crypto-Venture Capital (VC) entrepreneurs. Nearly six months later, the FAHK’s paper on ‘Best Practices for Token Sales’ remains one of the clearest discussions of the issues that really matter for deal makers who are looking to undertake ICOs.

In its paper, the FAHK identifies questions that are as relevant to ICO investors as much as to Crypto-VC entrepreneurs.

  • The project. Most crypto-coins (and, indeed, many securities that are listed on a conventional exchange) exist to solve problems. What is the problem that the new crypto-coin looks to solve? Will people see it as a viable solution to the problem? Is there already an effective solution that is being widely used?

  • The crypto-coin. Crypto-coins can provide solutions to problems. However, solutions to problems do not necessarily come from crypto-coins. How will the new crypto-coin really contribute to the solution of the problem in the way that another approach (e.g. an initial public offering or IPO from an existing company) would not? Are the economics of the IPO and the way in which the crypto-coin is to work really viable? In one sentence, who are the people who will buy the crypto-coin and why?

  • The entrepreneur. Virtually no successful enterprises depend on just one person. They depend on a team. Does the team behind the ICO have the expertise that is needed? If not, are they willing and able to buy in the expertise that they need? Taking into account the cost of buying in expertise, how will the IPO be financed?

  • The strategy. It is one thing talking about the issues that matter in an ICO. It is another to actually execute the deal. What are the details behind the ICO? What is the exchange on which the new crypto-coin will be traded? How will conversion between fiat currencies and the crypto-coin be handled? Could the vision behind the deal be better executed with private investments or private loans?

  • The Whitepaper. The Whitepaper is the document that explains an ICO in full. What matters is clarity. In the Crypto World as in the world of conventional investment, a potential investor’s understanding of the deal is key. The more that he/she really understands, the less likely it is that he/she will be disappointed. Does the whitepaper explain the essence of the project in no more than 200 words? Can the rationale for the crypto-coin be summarised in just one sentence? Does the whitepaper show that the team behind the ICO really have credibility? Even if it only does so with a graphic timeline and a series of bullet points, does the Whitepaper really explain how the deal is to be executed?

  • The risks. Perhaps most importantly, the Whitepaper should make it clear what are the risks and how the sponsors of the ICOs are working to mitigate those risks. Even if there is the real possibility that an investor in a particular deal will lose all the money that he/she is committing, it does not mean that the deal is a bad one. Have independent and professional advisers been involved with the preparation of the Whitepaper?

What are the basic principles that underpin initial coin offerings (ICOs)?

The technology media and telecommunications (TMT) boom of the 1990s took place mainly in North America and Europe. This was mainly because these were the places where technology innovators had the greatest access to venture capital (VC) financiers and global financial markets.

Key message 1: Asia is where most of the action will be

Some 20 years later, global markets are much larger and better integrated. Technology innovators have much easier access to VC financiers, end markets and each other. The early signs are that Asia, rather than North America or Europe, will drive the rapid growth of the Crypto World.

This is because Asia is home to the largest pools of institutional and household savings. The weight of money that is available in countries such as Japan, South Korea, China, Taiwan and Singapore for trading and investment in the Crypto World is enormous. 

One sign of this is that many of the most dramatic stories concerning the boom (and partial bust) in the price of Bitcoin through late 2017 and early 2018 came from Asia. Another is the set of results that you will get from a Google search for Best Practices for ICOs. Much detailed discussion comes from corporate consultants who are based in Hong Kong and China.

In December 2017, for instance, the Fintech Association of Hong Kong (FAHK) published a review entitled ‘Best Practices for Token Sales’. The FAHK suggests that the key characteristics of crypto-coins (or tokens) are that they include bundles of rights for the holders: records of the rights and the holders are stored on blockchains.

Key message 2: crypto-coins have many uses

Crypto-coins can, of course, also be traded on crypto-exchanges. Otherwise, they vary widely from each other in terms of what they do. The FAHK notes that a crypto-coin might, among other things:

  • Operate as a digital pre-paid voucher for a software licence;
  • Provide rewards based on the activities of the holder, or on some other metric;
  • Represent loyalty points, or
  • Be backed by, or represent an interest in, certain assets.

In spite of their name, crypto-coins almost never serve as money. Bitcoin provides a facility for people to hold and transfer wealth in a semi-anonymous way, but it is not a unit of account and is only a medium of exchange to a very limited extent. It is still too early to say whether or not Bitcoin is a good store of value.

Conversely, numerous crypto-coins have at least some of the characteristics of securities that are traded on conventional stock exchanges. The key feature of a security is that it provides evidence of a claim against the issuer by the holder.

Key message 3: a good ICO is not easy to put together

The FAHK suggests that any ICO should be designed in a way that considers seven principles:

  1. LAWS. It should comply with the laws and regulations in all relevant markets.
  2. BUSINESS MODEL. There should be a strong business model to launch and sustain the crypto-coin.
  3. SECURITY. The ICO should be secure in that investors’ interests are safeguarded.
  4. TRANSPARENCY. Material risks should be disclosed.
  5. REAL SOLUTION. The ICO should provide a solution to a real need, and one that is based on sound research and development.
  6. FAIRNESS. ICOs should not be priced at levels that are based on the greed and the fear of missing out (FOMO) of possible participants.
  7. LONG-TERMISM. The ICO should be associated with an enterprise that will deliver value over a reasonable period of time.
... or jump to: 2018