After a stratospheric run in 2017, the ICO market emerged with billions in funding for new projects. But the space was fraught with problems for those participating in it. From legitimate projects that failed to achieve the desired network effects to scams that swindled investors from millions of dollars; from corrupt advisors to new ventures, the ICO ecosystem gave birth to a slew of new organizations and issues to be fixed. Regardless of these problems, it garnered enough attention from investors worldwide wishing to participate in a nascent industry that attracted billions of dollars.
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So far in 2018, the ICO ecosystem has begun to shift driven by exogenous forces like regulation and government impositions. Endogenous efforts from the crypto community, and demand from institutional and traditional investors, have started pushing the space towards maturity. This endogenous push will create a fairer space with better investment opportunities for those involved in it. Exogenous forces might only serve to stifle it.
An entire series of articles could be dedicated to government legislation and regulation around the world. From the SEC in the US to Korean and Japanese regulators and recent FinTech laws in Mexico, governments around the globe are scrambling to figure out how to adequately regulate, tax, and govern the crypto markets. The ICO ecosystem is experiencing stricter KYC processes, pressure for AML measures, and anti-scam and pyramid scheme regulation. These in turn put pressure on ICOs to be better and select better investors but may make it more difficult for the average person to participate.
Change from within
Exogenous forces do not understand the space very well, which is why governmental efforts can stifle it. The crypto community itself knows the space better and it is well-suited to introduce its own governance mechanisms and platforms that can help the ICO industry refine itself. Many organizations and advisors have popped up to try to provide additional transparency to ICOs and prevent scams. Recently there has even been whistleblowing, shining a light on corrupt advising and benchmarking. There are efforts to provide a framework for self-governance for ICOs. There are legitimate ICOs, funds, and agencies that have begun to streamline KYC processes and ensure compliance with regulations. As such, the ICO ecosystem has begun to see more transparency, and a push for ICO projects that have true utility tokens rather than scams or mechanisms to circumvent traditional vehicles for funding startups.
The third and perhaps strongest force changing the way ICOs work is the influx of institutional investors. Crypto funds rose from 58 at the end of 2017 to 225 at midpoint of 2018. Notable names like Soros and Rockefeller have entered the market (through their venture capital funds), and even Wall Street has signaled its intent to participate in crypto markets. As traditional asset management funds enter the market, they demand the type of information and transparency they are accustomed to in traditional markets.
These forces intersect, planting the seed for the emergence of projects that seek to respond to these shifts. This year has seen ICOs that streamline KYC processes, the aforementioned whistleblowers on corrupt advising, and growth in the amount and type of ICO benchmarking and listings (despite the noted corruption in some of them). This year will also see the creation of the first token aftermarket which seeks to respond the 3 forces together. This project is called Vertex. It will feature a single KYC process granting its users access to pre-selected ICOs, transparent information and advising based on crypto and traditional investment metrics. Vertex’s incentives will align with the interests of the users, ICO projects and investors that participate in the aftermarket.
As the shortcomings of the nascent ICO market are slowly addressed, we expect to see an ICO ecosystem that seeks to be inclusive and transparent. This change will most likely come from within the ICO industry. So far during 2018, we have seen these endogenous forces gathering to offer better information and more serious projects.
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