Investors pouring millions into start-ups with nothing more than a white paper and entrepreneurs issuing dispensable digital coins to cash in on the hype are fanning a blockchain assets bubble, according to one of the ethereum network’s co-founders.
Firms have raised US$1.3bn this year in digital coin sales, surpassing venture capital funding of blockchain companies and up more than six-fold from the total raised last year, according to Autonomous Research. The so-called initial coin offerings helped ether, the digital currency linked to the ethereum blockchain, to surge from around $8 at the start of the year to just under $400 last month. It’s since dropped by about 50%.
“People say ICOs are great for ethereum because, look at the price, but it’s a ticking time bomb,” Charles Hoskinson said in an interview. “There’s an over-tokenisation of things as companies are issuing tokens when the same tasks can be achieved with existing blockchains. People are blinded by fast and easy money.”
Hoskinson is part of a growing chorus of blockchain technology watchers voicing concern about the rapid surge in cryptocurrency prices and digital coin crowd sales that have collected millions of dollars in minutes. Regulation is the biggest risk to the sector, as it’s likely that the US Securities and Exchange Commission, which has remained on the sidelines, will step in to say that digital coins are securities, he said.
Start-ups raising money through ICOs usually skip the safeguards required in traditional securities sales, like making sure they’re dealing with accredited investors and verifying the source of funds. That could lead to lawsuits in the future, as digital coin buyers can sue the issuer claiming they didn’t know the risks of buying those assets, Hoskinson said.
Hoskinson joined the ethereum founding team in late 2013 and left in June 2014 as he advocated for a for-profit entity while others in the team led by Vialik Buterin wanted to keep it as not-for-profit.
Ripple CEO Brad Garlinghouse had a similar view regarding regulatory risks. Teams listing companies offshore and selling their coins to investors outside the US are naive to think there are no investor protection laws elsewhere, and also think the SEC will eventually say cryptocurrencies are securities, he said in an interview last week.
Ripple is a money-transfer company based on the blockchain technology, that’s tied to the third largest cryptocurrency by market value.
“ICOs operating in the Wild West of finance isn’t sustainable,” Garlinghouse said. “If it talks like a duck and walks like a duck, the SEC will say it’s a duck.”
Besides the growing concern about an ICO bubble and regulatory concerns, ether trading outages stemming from the jump in transactions, companies cashing in on the money raised in crowd sales, yesterday’s $7m CoinDash hack and even false rumors that Buterin had died, have all contributed to the tumble in the price of ether. Concern about bitcoin potentially splitting in two is also sending jitters throughout the crypto world.
Still, like Ripple’s Garlinghouse, Hoskinson thinks once the currency ICO bubble deflates, cyptocurrencies will continue to be an avenue for companies to raise money, but it will be done in a regulated and more constrained environment.
“Regardless of regulation, ICOs are here to stay,” he said. “After it collapses they’re going to pick up the pieces and say how do we do things differently.” — Reported by Camila Russo, (c) 2017 Bloomberg LP