This is the era of blockchain and crowdfunding. This is the era of disruption. The emerging crypto market is comprised of a new and distinct set of investors and entrepreneurs. A new economic ecosystem has surfaced, causing substantial disruptions to the traditional payment services and banking industry.
Revolutionary digital assets like BTC, ETH, XRP (and many others) are generating new archetypes for financial transactions and creating alternate channels of wealth. In late February 2018, in the firm’s 10-K filed with the SEC, Bank of America admitted that cryptocurrencies were “a threat to its business model.” This was not untrue. Intermediaries, banks, and payment service providers are scrambling to keep pace.
But this is not to say that they will accept defeat. In fact, many of the major U.S. powerhouses of traditional finance and banking have already begun to utilize distributed ledger technology and incorporating blockchain into their financial systems. On May 22, Bank of America obtained yet another patent for a “system for managing security and access to resource sub-components.”
This is essentially how security tokens/electronic keys would be leveraged to allow informational access to only specific users within in a particular block. By as early as January 2018, Bank of America had already applied for/received, at least 43 blockchain related patents. Blockchain is a big deal, there’s no denying it. Blockchain is the art of permanently and securely recording a limitless amount of transactions in impenetrable cryptic blocks of algorithmic fun, with a wide range of variables and alternatives providing opportunities for customization. Bitcoin, for example, utilizes DLT by enabling its user to bypass the middleman and engage directly with other parties.
There will be valuable use-cases across industries, without question. One of the most influenced aspects of the financial market has been the fundraising space, causing major disruptions to the venture capital sector. Crowdfunding has changed the game, accounting for over 34.4 Billion dollars in 2015 according to Massolution’s 2015 Crowdfunding report, and the World Bank Report estimates that global investment through crowdfunding will reach $93 billion by 2025.
Recently, companies like Republic, StartEngine and Kickstarter have taken advantage.
These businesses have revolutionized the world of startups. Highly innovative ideas that perhaps lacked “traditional business appeal” have now found their solace. These platforms utilize the recently added exemption to the Securities Act, Section 4(a)(6), Reg C (also commonly known as “Reg CF”). This crucially vital regulation enables entrepreneurs to raise up to $1 million from both accredited and non-accredited investors. Under this exemption, the platforms automatically calculate the maximum amount that each person can invest, based on their annual income or the net worth. Many of the platforms allow their user to invest as little as $10–15 dollars. On the back end, these platforms secure their transactions with blockchain and serve as a trusted third party, holding the cash in escrow for a 2–5% fee, thereby assuming a portion of the consumer-risk — providing some fraud-protection for potential investors.
These platforms help disruptive projects find cash. Many small or obscure projects (excellent businesses) used to fall outside of the scope of many traditional avenues of investment and venture capital. Before crowdfunding, investing was not always accessible to the small investor. Large individual Angel investors and venture capitalists dominated the space. This type of rigid, boring, and predatory venture capital norm often resulted in disproportionate and inequitable equity allocation in favour of large investors. Due to the limited options available, in exchange for funding, hundreds of highly creative and innovative (geniuses, in some cases) entrepreneurs were often forced to surrender near unconscionably lopsided and excessive equity and control percentages in proportion to the business’ true valuation or were passed over entirely. Investing in private companies was lucrative. Venture capital had its own private club.
At times, traditional venture capitalism produced favourable financial results for certain individuals’ wallets, but it is undeniable that it often had the effect of stifling innovation and inhibiting the diversity of thought in favour of institutional motives and traditional ideologies. Furthermore, by limiting investment opportunities to large amounts by only “accredited investors,” millions of rational and capable investors were left out to dry. I believe that this was an example of systemic inequality that had the effect of contributing to the vastly growing level of wealth disparity across the world.
But things are changing. The power of the crowd has begun to democratize the venture capital arena. By utilizing revolutionary fundraising methods, like initial coin offerings (ICOs), SAFTs or Reg CF offerings, investors can directly contribute to innovative projects, start-ups and businesses. Now, investors of all shapes, sizes, and new worth can freely engage in the “venture capital” space. But should we even still call it that?