3 ways blockchain startups can play by the rules in 2018

MAS headquarters in central Singapore / Photo credit: Tech in Asia

Darvin is a TIA Star Contributor and publishes exclusive, high-value content that serves the Asian tech community. Read more from TIA Star Contributors here.

Last year, the world began paying attention to initial coin offerings (ICOs). More than US$5 billion flowed into the market, with thousands of blockchain startups trying to stay afloat. Some succeeded, but most didn’t.

Unless these startups have the right teams, seek legal advice, and mobilize a community, they will run into issues in 2018, and harmful repercussions will ripple across the industry as faith in the blockchain economy is diluted.

With the technology just starting out, it is our responsibility as founders to lead by example and develop tested, ethical business models that others can aspire to and adopt.

Here are three ways blockchain companies can prove their worth in 2018.

1. Justify your ICO

ICOs are a novel way for startups to gain the capital they need in order to evolve their whitepaper from theory into practice.

In exchange for bitcoin or ether, startups will offer their unique coin or “token” to be used as cryptocurrency on their blockchain platform or as an allocated asset. These tokens can hold value of real-world assets, such as a shares in real estate or works of art.

A telling example of how a token’s intrinsic value can be easily distorted is the infamous case of Tether. Their token was considered a “stablecoin” due to its value being pegged to the US dollar (1 Tether coin = US$1). Yet some claim that Tether may be creating tokens out of thin air, and this has in turn manipulated the entire cryptocurrency market. A planned audit of the Tether company recently fell through, according to some reports.

Taking this into consideration, startups should make sure they understand how tokens will benefit their company, business model, and wider investor community before launching an ICO. They need to establish whether their coins are tokens or simply securities. If it’s the latter, they may be subject to certain restrictions.

This has been the case with many US-based startups like Caviar company, who have faced penalties from the US Securities and Exchange Commission (SEC) for skirting the boundaries between security and token.

There are different types of tokens: utility, reward, and currency. The strict definitions and components of tokens, however, are still unclear and malleable. Startups may call a token whatever they wish, but should prove that their funds are not securities.

Some ICOs have simply swept investors clean of their money. So, increasingly skeptical investors are quick to question the motives and needs for launching a token sale.

2. Getting it right from day one

The majority of failed ICOs were inspired by great ideas yet lacked the fundamental research and legal guidance necessary to deliver their whitepaper concepts.

3. Nothing to hide from community