2018 March 05 - Volume.2 Issue.9

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2018 March 05 - Volume.2 Issue.9

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Murky Progress for Projects Following Mega ICOs

The boom of Initial Coin Offerings (ICOs) made it possible to raise capital globally without an intermediary, regulatory responsibility or even basic investor relation tenants. Setting up an ICO was considerably cheaper and easier than traditional fundraising methods because of lack of regulation. And as most ICOs purposely tried to avoid being labeled as a security, compliance and due diligence requirements were nonexistent. Apparently, so is adhering to investor promises and communicating progress with the public, as roadmap deadlines keep getting pushed back.


Equity and debt have enforceable legal obligations, but ICOs that specifically try to avoid being labeled a security have technically no obligation to follow the plans that they laid out in the whitepaper. Of course, the ICO projects can be labeled as a security retrospectively by the SEC or other regulatory agencies, but enforcing legal claims will prove to be difficult (Diar, 26 Feburary). The laws that govern contracts can apply to some ICOs but most of the projects are situated outside of the United States and holdings in cryptocurrencies are impossible to be seized.

The ease of raising large sums of money by simply having a whitepaper and having no enforceable obligation to investors attracted many scams and frauds. Citing concerns of scams, the SEC issued investor warning regarding ICOs, South Korea has banned local companies from ICOs and China has outright banned them all-together.

A recent study by Bitcoin.com found that a 46% of ICOs launched in 2017 have already failed with the total amount lost of $233Mn (Diar, 26 Feburary). This sum represents a mere 4% of all funds raised through ICOs in 2017 as the total amount is largely driven by a small number of very large projects (see chart). A whopping 40% of the total raised through ICOs in 2017 were to allocated 20 projects alone (see table).

If any of these twenty projects were to fail, It could result in a systematic effect on other projects as they are largely driven by confidence of investors. Diar reached out to 10 of these projects (Filecoin, Tezos, EOS, Bancor, QASH, Kin, Comsa, TenX, TRON and SALT) to get a comment about the progress of their originally proposed road maps. To this publication’s surprise, only Bancor and SALT responded to our email. We did not hear back on our follow-up questions from SALT.

The lack of communication from these projects is in stark contrast to publicly traded companies who make a conscious effort to speak to investors and press, highlighting the lack of professionalism and business acumen in the space that has raised over $5Bn in 2017, and, according to TokenData, is quickly reaching that mark in 2018 with close to $4Bn raised already this year.

|| FILECOIN DELIVERS….RADIO SILENCE

Filecoin, which is building a decentralized storage network, raised $257Mn in September. Since then, it has released one blog post and has been completely quiet on Twitter. In their last blog post from January 1, Filecoin said that they have been “heads down turning Filecoin’s tremendous potential into reality”. Realistically, such an ambitious project should periodically share information with its community. In comparison, Dropbox, which has a functioning business model tested and a history of more than 10 years is targeting $500Mn from its upcoming IPO.

|| GOVERNANCE GRIEVANCES

Tezos’ problems warrants a story of its own. Tezos also raised over $200Mn but has been displaying tremendous governance issues caused by a dispute between its inventors and a Swiss nonprofit foundation overseeing the project. The company headed by the inventors owns the code of the platform while the foundation holds all the money raised in the ICO. This has delayed the project by many months and Tezos has still not been launched. Tezos is facing four class-action lawsuits for violating the securities law and for investor fraud (Diar, 26 Feburary). After many months of disputes, the president of the Tezos Foundation stepped down and was replaced by new board members who are preparing the launch of the Tezos network. The originally scheduled release was in Summer 2017.

|| VISA/MASTERCARD DEPENDANTS?

TenX, aims to provide a cryptocurrency debit card allowing customers to spend their digital tokens anywhere. Except – it doesn’t – and may find a very difficult time finding an issuing bank for their Visa or Mastercards (Diar, 6 November 2017). TenX raised $80Mn in June 2017 and did indeed have a functioning card that was provided by WaveCrest, an issuing company that was responsible for providing the vast majority of cryptocurrency debit cards (Diar, 6 November 2017).

Over $1.5Bn in ICOs Raise in 2017 Goes to 17 Projects Alone


While Total Funds Raised of Failed Projects is Small...

...Number of Failed Projects is Staggering 


Source: Diar, TokenData.io


However, Visa ended the relationship with WaveCrest in January, which effectively hindered a TenX card useless. Julian Hosp, the founder of TenX, promised in January that the company would send a replacement card issued by their new issuer Wirecard. The founder spinned the new as a “huge opportunity” for TenX and that he can't wait for the moment when they “can announce that TenX is the only crypto debit card live”.

But there are cards that are already working now such as BitPay, Shift, WageCan, CoinJar and Centra Tech (Diar, 8 January). Two months later, TenX is still to ship the new card. In the original road map, TenX said that their card would support Bitcoin, Ethereum, ERC20, Gold and Fiat tokens by the end of 2017. As of date, TenX don’t have a functioning card and they still don’t support gold or fiat tokens. ERC20 tokens are in the internal alpha phase.

|| HUGE DEMAND PINCHES SALT

SALT, a membership-based loan platform with accredited investors as lenders allows borrowers the use of Bitcoin to leverage their holdings as collateral and borrow USD for relatively low-interest payments. When compared to other blockchain lending platforms, SALT is limited by only allowing accredited investors, which limits the available capital (Diar, 20 November 2017). SALT recently announced that they are temporarily halting accepting new borrowers to “focus on scaling the processes and technology to meet the huge demand”. Potential borrowers took to twitter to complain about loan applications months ago but never heard back. The pause on potential borrowers may highlight a lack of liquidity on the platform.

And the volatility of bitcoin could have exacerbated the problem. With the price of Bitcoin falling, the value of the collateral drops below the required amount while the loan is still active and the borrower has to increase the collateral amount or make an advance payment of the loan. It is unclear how borrowers handled the situation when the price of Bitcoin fell by more than 60% from December to February. SALT did not respond to our request for comment.

|| STILL IN THE GREEN

Nonetheless, most of the projects still made positive returns, at least in US Dollars. Only 4 out of 17 tokens that are already traded lost money versus USD. What’s more interesting though, is to look at the returns in terms of Ethereum. The majority of these ICOs were bought for Ethereum and 7 out 17 projects underperformed Ethereum in terms of price. These projects include Sirin Labs, Bancor, Kin, Comsa, TenX, BANKEX and MobileGo.

But the lack of concrete progress and business models make these Top ICOs a massive systemic risk considering the very fickle nature of crypto investors. And the communication of the largest ICOs has been underwhelming to say the least, this publication finds.

Name Raised (Mn) Market Cap (Mn) Mission Problems
Hdac $258 - IoT Platform for Smart Homes in Korea Not affiliated with Hyundai Motors of Hyundai Group, possibly misleading investors.
Filecoin (Futures) $257 - Decentralized storage network with a marketplace Cheap tokens for advisors, weak communication (inactive on blog and Twitter)
Tezos (Pre-Launch) $232 - Self-amending ecosystem built on top of a Proof of Stake with advanced smart contracts (functional paradigm and formal verification) Governance issues with Tezos Foundation, class-action lawsuits for issuing securities
EOS $197 $5,774 Scalable smart contract ecosystem EOS remains an ERC20 token
Sirin Labs $158 $68 Secure blockchain smartphone and a computer Concept technology with no proof of concept
Bancor $153 $198 Asynchronous decentralized exchange working with smart contracts Token necessity questionable
Polkadot $145 - Ecosystem intended for interoperable blockchains Affected by the Parity Wallet vulnerability, Pre-sale numbers not transparent
QASH $106 $288 Tying exchanges together to increase liquidty for institutional investors QASH Bounty being used as a mean for promotion
Status $100 $624 Client for Android and iOS that creates a gateway to Ethereum Reliant on mass adoption
Envion $100 - Mobile mining sites inside shipping containers and move them to places with cheap electricity Overcomplicated plan, unpredictable mining market (difficulty)
Kin $98 $221 A tradable internal currency within Kik Large supply, not necessary for the platform and no roadmap supplied
Comsa $95 - One-stop solution for streamlining the ICO process Purely focused on Japan, dilluted cap (50% of tokens sold)
PressOne $82 - Decentralized content distribution platform Lacking technical details, only Chinese market, unclear legal status
TenX $80 $197 Debit card that will allow to spend cryptocurrencies anywhere Not currently working, delayed developments, a lot of competition, limited results
BANKEX $71 - Platform that enables the creation of Smart Assets The future of asset tokenization is unclear, commence operation in 2019
TRON $70 $3,133 Blockchain platform for the digital entertainment industry that gives creators control over their content Large supply, long term project (roadmaps extend as far as 2025)
Nebulas $60 $284 Search engine for blockchain Competition: Google.
MobileGo $53 $59 Create of a decentralized marketplace to trade digital goods from games Needs wide-scale adoption
Kyber Network $53 $275 Decentralized exchange with instant trading Could be bypassed by implementing diectly in ETH, KyberNetwork's reserve system is capital intensive
SALT $48 $234 Lending platform secured by cryptocurrencies Lenders can only be accredited investors, collateralized loans in crypto are unpredictable

Name Raised (Mn) Market Cap (Mn) Mission Problems
Hdac $258 - IoT Platform for Smart Homes in Korea Not affiliated with Hyundai Motors of Hyundai Group, possibly misleading investors.
Filecoin (Futures) $257 - Decentralized storage network with a marketplace Cheap tokens for advisors, weak communication (inactive on blog and Twitter)
Tezos (Pre-Launch) $232 - Self-amending ecosystem built on top of a Proof of Stake with advanced smart contracts (functional paradigm and formal verification) Governance issues with Tezos Foundation, class-action lawsuits for issuing securities
EOS $197 $5,774 Scalable smart contract ecosystem EOS remains an ERC20 token
Sirin Labs $158 $68 Secure blockchain smartphone and a computer Concept technology with no proof of concept
Bancor $153 $198 Asynchronous decentralized exchange working with smart contracts Token necessity questionable
Polkadot $145 - Ecosystem intended for interoperable blockchains Affected by the Parity Wallet vulnerability, Pre-sale numbers not transparent
QASH $106 $288 Tying exchanges together to increase liquidty for institutional investors QASH Bounty being used as a mean for promotion
Status $100 $624 Client for Android and iOS that creates a gateway to Ethereum Reliant on mass adoption
Envion $100 - Mobile mining sites inside shipping containers and move them to places with cheap electricity Overcomplicated plan, unpredictable mining market (difficulty)
Kin $98 $221 A tradable internal currency within Kik Large supply, not necessary for the platform and no roadmap supplied
Comsa $95 - One-stop solution for streamlining the ICO process Purely focused on Japan, dilluted cap (50% of tokens sold)
PressOne $82 - Decentralized content distribution platform Lacking technical details, only Chinese market, unclear legal status
TenX $80 $197 Debit card that will allow to spend cryptocurrencies anywhere Not currently working, delayed developments, a lot of competition, limited results
BANKEX $71 - Platform that enables the creation of Smart Assets The future of asset tokenization is unclear, commence operation in 2019
TRON $70 $3,133 Blockchain platform for the digital entertainment industry that gives creators control over their content Large supply, long term project (roadmaps extend as far as 2025)
Nebulas $60 $284 Search engine for blockchain Competition: Google.
MobileGo $53 $59 Create of a decentralized marketplace to trade digital goods from games Needs wide-scale adoption
Kyber Network $53 $275 Decentralized exchange with instant trading Could be bypassed by implementing diectly in ETH, KyberNetwork's reserve system is capital intensive
SALT $48 $234 Lending platform secured by cryptocurrencies Lenders can only be accredited investors, collateralized loans in crypto are unpredictable

Bank of England Looks to Integrate Digital Assets into Financial System

In a speech delivered last week at Bloomberg’s European Headquarters on 2 March, Bank of England (BoE) governor Mark Carney highlighted several points on how cryptocurrencies might pose a threat to current markets, and in which way the British nation will wish to address regulation and classification of digital assets at the upcoming G20 Summit.


Mark Carney is of the stance that cryptocurrencies, have a slim fighting chance to take over the use of fiat currency, and as such, has classified them as “cryptoassets”. The usual suspects of concern came up during his speech – investor protection, money laundering and terrorist financing and tax evasion (see table).

However, a new entrance to the list of worries was added – the circumvention of international sanctions, a tip pointing towards the recent launch of the Venezuelan national cryptocurrency, the Petro (Diar, 26 February).

While the governor doesn’t believe that “cryptoassets” pose any risk to the UK’s financial markets, the financial policy committee of the central bank is looking further into the matter, as well as the financial stability board, who will submit their findings to the G20 in Argentina next month.

|| ISOLATE, REGULATE OR INTEGRATE?

Mr Carney was quick to dismiss the path that China has taken in an outright ban citing the potential loss of a major opportunity from the development of Distributed Ledger Technology (DLT). The BoE has been at the forefront of economic research for a potential Central Bank Digital Currency (CBDC), and has been testing various DLT platforms, including Ripple for cross-border payments (Diar, 20 November 2017).

The Central Bank’s governor suggests to regulate “elements of the cryptocurrency ecosystem, to combat those illicit actives, promote market integrity and protect the safety and soundness of the financial system.”

The Woes of “Cyrptoassets” According to Mark Carney

  • Lack of Investor Protection
  • Money Laundering
  • Terrorist Financing
  • Tax Evasion
  • Circumvention of Capital Controls
  • Circumvention of International Sanctions
  • Extreme Price Volatility
  • Poor Market Liquidity
  • Fragmented Markets
  • Highly Concentrated Holdings
  • Manipulation & Misconduct
  • Technological Weaknesses*

* Regarding Cryptocurrency Exchange Heists – Read More Here


|| ON PAR WITH OTHER ASSETS?

As regulators around the world begin rolling out Initial Coin Offering frameworks and guidelines, Mr Carney seemingly gave weighted legitimacy to tokenized assets as he called to “hold the cyrptoassets ecosystem to the same standards as the reset of the financial markets” (Diar, 26 February).

Mr Carney highlighted the requirements on European and US based exchanges to adhere to Anti-Money Laundering and Counter-Terrorist due diligence requirements.

|| ICOS ALL BUT OFFICIALLY A SECURITY?

It seems that the governor is of the camp to classify ICOs as securities, echoing the views of the US Securities and Exchange Commission Jay Clayton during his testimony to congress last month (Diar, 12 February).

UK Mobile Payments Witness Exponential Growth

While still a far cry from China who processed close to $7.5Tn in 2017 through mobile payments thanks to AliPay and WeChat, UK mobile payments grew by over a whopping 300% according to WorldPay - nearing a total of £1Bn. The new trend, showing exponential growth, shows promise according to WorldPay, in higher ticket purchases showing a greater trust and ease in using mobile service providers.

China Forecast: Transaction Value of Third Party Payments ($Tn)


Source: FT, Forrester Research

German Securities Regulator Weighs-In on Cryptocurrencies

The Federal Financial Supervisory Authority of Germany (BaFin) last week published a circular clarifying it's position on Initial Coin Offerings (ICO). The German regulator has seemingly classified all ICOs as securities. Based on the below assessments according to Law firm Latham & Watkins, tokens will qualify as a security if:

1. They can be transferred, and are negotiable on financial or capital markets.
2. They represent membership rights or claims (or any comparable rights).
3. They are not payment instruments.
4. The holder can be documented in a blockchain or distributed ledger (or similar) technology (no representation by a physical instrument required).

But Berlin has left the door cracked a little open as it also indicates that ICOs will need to be assessed on a case-by-case basis. Unlike their Swiss counterparts, FINMA, who issued their guidlines last month, BaFin has not indicated clearly the regulatory outlook on the various types of tokens, be it a payment, asset or utility token.

Selected Data: Bitcoin's Dominance Upward Trend Continues

Week on Week Market Cap Growth For Bitcoin Inches Up....

But Average Transactions per Block Plummets 60% From December High

...Even Though Average Next Block Fees Drop ($ USD)

But Average OHLC on The Up Following February Low (BTC/USD)


Source: Diar, CoinMarketCap, Blockchain.info, Bitcoinfees.info

Genesis Lending
More institutional products are coming of age this year with Genesis Capital, a Digital Currency Group company, to begin a lending program. With a $100K minimum investment, Genesis aims to offers what other clearing houses have refused to do - offer a possible hedge for portfolios, or speculative short positions against several cryptocurrencies including Bitcoin, Ethereum, Ethereum Classic, Ripple and ZCash.
Bitwala to Relaunch as Cryptocurrency Bank
Bitwala, a payment service based out of Berlin announced the refocus of the firm and transforming the business into a cryptocurrency Bank, partnering with an already established German bank. The roadmap highlights some ambitous goals including becoming "Europe's largest lightning node", as well as expanding into Asia, the USA and offering retail banking services such as loans.
Class Action Lawsuit Against Coinbase
Following the highly contentious launch of Bitcoin Cash on Coinbase, the popular exchange now faces a class action lawsuit. The plaintiffs are accusing Coinbase of insider trading ahead of the launch on 20 December 2017, when it was slated to launch on 1 January 2018 following an annoucnement by Coinbase that they would support Bitcoin Cash following the fork from Bitcoin on 1 August 2017.
JP Morgan Rings Small Alarm Bell
Following in the footsteps of Bank of America (BofA), JP Morgan mentioned cryptocurrencies in its 2017 SEC filings. Financial institutions “face the risk that payment processing and other services could be disrupted by technologies, such as cryptocurrencies, that require no intermediation.” The warning shot was similar to that of BofA mainly focused on the payments infrastructure.

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