Investors, firms grapple with the bubble
With Bitcoin prices dominating the news and every Tom, Dick and Harry jumping on the blockchain bandwagon, most people are getting sick of the distributed ledger technology.
And speakers at last week’s London BlockchainWeek conference certainly did their fair share of pearl-clutching about the tech’s breathless publicity. (Although such messages were arguably undermined by the wealth of “fund my company’s ICO” pitches spread across the event, and the Bitcoin fanbois cheering every mention of rising share prices.)
Panellists in debates across the two days condemned scam initial coin offerings, where firms offer nothing but a nice idea, and came down hard on a situation that they said had led to too much money being thrown at immature businesses.
But they also tried to temper the gosh-isn’t-all-the-hype-terrible, arguing that the dotcom bubble faced a similar situation and still pushed out a few successful companies. Some maintained that the “bad players” would be weeded out over time, leaving the market open for the genuine companies.
Not everyone agreed, though, expressing concern about the ICO funding model, which sees companies raise money by selling cryptocurrency and digital tokens, ostensibly to develop a platform to support them.
However, investors described being swamped by 30 to 40 white paper pitches a day – so many they couldn’t hope to properly consider them – and others warned that increasing numbers of ICOs would saturate the market and spread cash too thinly. But a broader concern was the intangibility of what these firms are offering.
“I’m uncomfortable with ICOs at the minute,” said William Piquard, head of strategy at Hong Kong-based token exchange Gatecoin Limited.
“Usually, with conventional venture capitalists, you invest in a company and they see not only the potential, but also what the company has delivered.
“With ICOs at the moment it’s not the case. The investor just quickly reads a business white paper and sends the money… If you raise $100m, what’s your incentive to deliver?”
However, Frank Schuil, co-CEO of Bitcoin exchange Safello, said this was reflective of a breakthrough technology that would disrupt how investments are made.
“It opens up the market [that] was controlled by venture capitalists,” he said. “Also for investors, where they get a quick return on investment.”
The argument runs that firms that would have previously relied on venture capital funding now have another way to access capital. Whereas at the moment those who can’t raise money from VCs might choose crowdfunding, now they can also do an ICO or token sale.
That allows them quick access to capital – especially when investors are throwing cash at any firm bolting “blockchain” onto its name – and doesn’t require firms to give away a chunk of shares or any control.
Firms are also instantly liquid, which proponents say is good for investors who don’t have their money locked into one firm for months or years.
But getting that initial investment is one thing; whether firms will be able to continue pulling in investment – or be left as orphans in the second round – is quite another.
Edouard Gaussen, associate at VC fund White Star Capital, said that since 2013 most blockchain companies failed to raise their second round.
“I’ve heard a lot of crazy things over the past 12 months,” Gaussen said, referring to the predicted collapse of the VC industry. But, he added, if venture capitalism didn’t add “more value than the money” it would have failed a long time ago.
Educating the regulators
The counter to the instant ICO cash grab and concerns about people getting scammed is regulation.
“There’s a strong need for the balance of regulation and innovation. We strive to be regulated,” said Yale ReiSoleil of McAfeeCC.
But others were, unsurprisingly, less enthusiastic about the strict approach taken by some governments.
China, which banned ICOs towards the end of last year, and the recent comments from the chairman of the US Securities and Exchange Commission, were certainly not welcomed by attendees – “where can we go to avoid SEC annoyances?” asked one.
When asked to pick more “open-minded” jurisdictions, speakers in a panel session on regulation suggested Bermuda, Slovenia, the Isle of Man, Singapore and Gibraltar.
“There are other jurisdictions… If any jurisdiction is sleeping at the wheel, go elsewhere,” said Gabrielle Patrick, CEO of Knabu Distributed Systems.
But other speakers acknowledged the difficulties of regulating a decentralised technology that can cover multiple jurisdictions.
“It’s about the complexity of the technology itself – even for a practitioner or anyone short of a PhD in crypto, it’s very, very hard for anyone to absorb,” said Jim Nasr, former chief software architect at the Centers for Disease Prevention and Control. “Regulators really just don’t have the resources to [understand] these things.”
Jon Ferris, strategy director of Electron – a blockchain for energy biz – agreed. “Everyone has heard of blockchain, [but] their understanding hasn’t increased comparatively,” he said. Industry has a “huge role” in educating the regulators.
But that presumes industry has got its head wrapped around blockchain, which isn’t really true. Although some startups may claim to be using blockchain for legitimate purposes, there are many more who haven’t really considered whether it’s what users really want.
“There are a lot of business cases built on blockchain that don’t necessarily merit blockchain,” said Nitesh Srivastava of Tallysticks.
And, he said, when it comes to the enterprise going beyond small proof-of-concept projects, there will be a “huge infrastructure and mindset change” needed in order to get blockchain into mainstream or widespread usage.
Jason Kelley, IBM’s general manager of blockchain services, said that, if 2016 was the year of blockchain “tourism”, and 2017 of proof of concept, 2018 needed to be the year it enters production.
But, he cautioned, “this thought of throwing blockchain at everything is absurd… You have to understand what works”.
For most panellists, that means focusing on situations where there are a lot of links in a chain and the partners don’t necessarily trust each other, especially when these processes would benefit from greater transparency and more speed.
Crucially, though, companies should think simple, for instance using blockchain for smart contracts or back office processes, or for managing supply chains in shipping or food security. But most agreed that removing intermediaries from every step of business operations is a long way down the line.
“Getting interest from a large corporate is relatively easy,” said Hugh Halford-Thompson, co-founder of BTL group, a firm that has developed an enterprise-grade private blockchain development platform.
But getting a project moving needs the buy-in of stakeholders and a team who will figure out how to build out and support it long-term.
“If you’re doing it as a proof-of-concept, that’s probably where it ends,” he said. “But if it’s going to be a critical system, you need to workout how to integrate it; how to support it.” ®
