Say you wanted to open an amusement park. Rather than meeting with investors, the creator can presell "tokens" for guests to play in the park, then continue issuing them as time goes on, using the money to build the amusement park. What's more, you've also created a secondary market for trading those tokens for actual use in the park.
This is typically how PwC global blockchain practice founder Subhankar Sinha explains cryptocurrency, a financial system built upon blockchain technology. At a July 20 event at Morrison & Foerster's New York offices, Sinha joined a panel of experts from law, finance and technology to discuss how initial coin offerings (ICOs), the raising of funds for cryptocurrency projects, are impacting the way organizations are funded. And while this approach to funding is increasingly popular, it's raising concerns among everyone from technologists to lawyers in addressing regulations.
"What you're seeing now is what happens when you create a financial market and there's zero regulation," said Nick Chirls, founder and partner and Notation Capital, a company that invests in cryptocurrency projects. "I think what you're seeing now is the full range of highly responsible behavior that will be very positive for the ecosystem going forward, and some projects that lack that. That, I think, really is a major risk for the ecosystem."
The cryptocurrency market is highly speculative. As reported in Vox, Garrick Hileman, Bitcoin expert at the Cambridge Center for Alternative Finance, said that speculation was "the primary driver" in the increasing value of the cryptocurrency Bitcoin. In June, the value of bitcoin reached a record high at $2,900.
And cryptocurrency projects have raised massive funds. Fortune reported in June that "Bitcoin and its ilk" have a worth of $107 billion, with up to $6.6 billion transacted on a daily basis.
While some projects go unfunded, a bigger challenge for the space is "too much money funding what are typically very, very early-stage projects," said Chirls.
Emma Channing, general counsel at The Argon Group, noted that her company does a market report on the success of cryptocurrency companies every couple of weeks. "People tend to say the market is very fruffy," she said. However, the market seems to be trending toward ICOs with an actual market product, rather than speculation.
Channing also disagrees with Chirls on the nature of regulations around cryptocurrency. "If I was a betting person, I think the FTC [Federal Trade Commission] is going to drop a flaming pile of dog dung on it," she said. Further, she said that while the Securities and Exchange Commission doesn't currently "have a force for this," she "would strongly bet this is where it's going to focus its guns."
