ICO bubble mirrors both the good and bad of dot-com era

When one is looking for perspective on recent developments in the blockchain and cryptocurrency sectors they can do much worse than speak with Justin Newton.

Mr. Newton is the founder and CEO of Netki, a blockchain open source and open standards compliance solutions provider. An early internet pioneer and platform architect of four companies that exited with $1 billion-plus IPOs, he also founded the Internet Service Providers Consortium, the first ISP trade association. Mr. Newton has also advised more than one dozen startups.

I first contacted Mr. Newton to get his thoughts on Laura Shin’s article in the July 27 edition of Forbes. The Emperor’s New Coins: How Initial Coin Offerings Fueled A $100 Billion Crypto Bubble discusses the wild valuations ICOs are creating for companies which in many cases have yet to provide much of value. Over the past year ICO market caps have surged 870 per cent to north of $100 billion, a growth rate more than six times the rise in stock market capitalization during the late 90’s dot-com boom, she wrote.

Justin Newton

Justin Newton

Mr. Newton said that on the whole, many things Ms. Shin said were quite accurate. He then took a step back to look the opportunity the ICO provides under-represented entrepreneurs.

“What’s most exciting about ICOs is there are both ideas and communities of entrepreneurs that have difficulty raising money,” Mr. Newton said. “Anything that brings capital to more diverse ideas and communities is good.”

Most venture capital is limited to a few geographies, so people not plugged in there, along with women and people of color, now have another method to bring their ideas to market.

The SEC recently cautioned that ICOs and token sales are subject to the requirements of federal securities laws. The statement came after a Report of Investigation determined that DAO tokens were securities, making them subject to federal securities laws.

“The Report confirms that issuers of distributed ledger or blockchain technology-based securities must register offers and sales of such securities unless a valid exemption applies,” the SEC said in a release. “Those participating in unregistered offerings also may be liable for violations of the securities laws.”

The Monetary Authority of Singapore issued a similar warning on Aug. 1, Mr. Newton said.

The market has rapidly grown without much self-regulation, and that comes with challenges such as the potential for harmed consumers, Mr. Newton said. Netki is helping many companies fulfill their AML and KYC obligations in order to lessen the risk on both sides.

“Think about it the way you would if (your company) was not on the blockchain,” Mr. Newton suggested.

Some companies may not accept non-accredited investors if it leads to increased regulatory scrutiny, Mr. Newton said. Others could register with the SEC and other bodies when issuing tokens.

“The SEC wanted to warn people this does fall under regulation,” Mr. Newton said. “They moved slowly to ensure the accuracy of their use case.”

The SEC took their time examining the DAO and their findings give regulators the opportunity to enforce standards if the market behaves poorly.

Yes it’s wild times for the cryptocurrency industry, and like their dot-com predecessors, many will fail spectacularly while a lucky few may be transformational, Mr. Newton said.

While we wait for the winners and losers to sort themselves out, ICO investors have to contend with one key issue.

“They’re not factoring in risk based on the stage of these companies,” Mr. Newton warned. “Just like how the IPO didn’t change valuation challenges in 1998-99.”

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