ICOs, the latest blockchain innovation to know about

If you've never heard of an ICO, or Initial Coin Offering, then you’re not alone. The first one to take place in Australia was only announced a few weeks ago.

This first of its kind event may well have passed you by - and I say that even though it was issued by PowerLedger, the business I co-founded. While it was big news to people in the energy, finance and technology industries, ICOs aren’t terribly interesting to the public at large just yet..

Like so many developing technologies, blockchain, cryptocurrencies and accompanying instruments like ICOs have not established themselves as a business priority yet.

It takes time for early adoption of technology to become mass adoption and our ICO is the first of the Australian leg of this particular journey.

While the current perception may be that blockchain is just for techies and bankers, there’s strong evidence that it is on a course to disrupt a broad range major industries and bring about business efficiencies that we’ve never seen before.

Which is why the Australian Government released two weighty research studies in June about how blockchain might change the economy in the coming years. These reports examined the risks and opportunities of the technology, as well as attempting to imagine potential economic realities for the year 2030.

As the report states: “the full potential of blockchain technology is likely to be realised outside financial services and government”.

One obvious area of change is within supply chains, where the benefits of trust and transparency could have a huge effect on construction and manufacturing. We are already seeing this within the mining industry, where Everledger’s blockchain technology is being used to eradicate the trade in illicit diamonds.

While the fundamentals behind the technology have been covered elsewhere, ICOs are less well known and have some unique traits that are worth understanding.

ICO vs IPO

Like IPOs, or Initial Public Offerings, ICOs are used by businesses to raise fresh capital in order to grow and expand. However, there are some key differences between the two.

In the IPO model, investors exchange their cash for shares - ownership of part of the company, dividends and the accompanying voting right.

They can buy more control in exchange for more cash, without ever having to purchase any of the company’s product or services.

While some ICOs may offer participants equity, ‘tokens’ issued by the company are more commonly on offer, which can be used to buy their products and services (or sold to other participants).

In effect, they’re buying into an economy that they want to participate in and, as a result, ICOs have attracted a different type of investor.

Who is participating?

Until relatively recently, it was members of the blockchain community, together with tech-savvy cryptocurrency investors who got involved in ICOs.

However, as more have occurred around the world, we’ve seen more venture capitalists, hedge funds and institutional investors get involved. The makeup of participants has certainly been influenced by the token rather than equity-based nature of these offerings, but also by the complexity behind the technology.

While most companies provide considerable information to help potential participants assess the opportunity offered by an ICO, it tends to be very heavy stuff unless you hold advanced degrees in computer science or mathematics.

Even buying cryptocurrencies to exchange for tokens is more complex than the general public are comfortable with.

As a result, mass market investor involvement in ICOs is still someway off. We’re certainly nowhere near the anecdotes about members of the public talking about their portfolio that normally pre-empt the bursting of an investment bubble.

The Future of ICOs

Just like the blockchain and cryptocurrency technology that underlie it, ICOs are at a very early stage of existence, and how they will continue to evolve is not yet clear.

For the foreseeable future, I can only see blockchain businesses like ours offering ICOs because of the token-based nature of these deals.

From the investor side, as both the underlying technologies and the deal process itself become more familiar, we’re likely to see a wider range of investors take part.

As this evolution happens, I am certain that further regulations will be introduced, particularly if there’s any sort of negative news or outcomes that accompanies it.  

Like its international counterparts, the Australian government already has blockchain on its radar for future economic innovation, and is also weighing up how it might regulate the more established market of bitcoin trading.

What effect this potential new regulatory framework will have is difficult to say. What I do know is that while I may have been involved in the first ICO to take place in Australia, it certainly won’t be the last!

David Martin  is a co-founder, and the managing director, of Power Ledger, a peer-to- peer marketplace for renewable energy. Using blockchain technology, the platform provides a transparent, auditable and automated market trading and clearing mechanism for residential and commercial businesses to decide who they want to sell their surplus energy to and at what price. It recently commenced a technical trial of its peer-to-peer platform with Origin Energy. It has also has just finalised an agreement with global company Tech Mahindra to conduct a series of technology trials aimed at bringing the benefits of energy microgrid developments to India’s booming urban population, through Microgrid-as-a-Service.