Category Archives: ICOs

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Morgan Creek Digital Forecasts Fall and Rise of Crypto Hedge Funds

The Founder of Morgan Creek Digital, Anthony “Pomp” Pompliano, forecasts that cryptocurrency-oriented hedge funds will begin to close their doors. Further, Pompliano says regarding the bear market that “things will get much worse before they get better”.

There are two main factors that will cause cryptocurrency hedge funds to shut down according to Pompliano. First, there is something called a high water mark, which determines the salary of hedge fund managers. Basically, hedge fund managers only receive their performance fee, which is usually 20% of profits, if the fund’s net assets are higher than in any previous period. Due to this bear market, which has seen the price of Bitcoin decline from USD 20,000 to less than USD 5,000 in a year, practically no cryptocurrency hedge fund managers will get their performance fee, making their businesses much less lucrative.

Pompliano thinks cryptocurrency hedge funds will close down, be quiet for a few months or up to a year, and then restart under a new name. Since the market is at a very low point, closing an old fund and launching a new one will likely ensure consistent performance fees for fund managers.

The second factor that will cause cryptocurrency hedge funds to close down is the increasing Securities and Exchange Commission (SEC) enforcement in the initial coin offering (ICO) market. Recently, the SEC issued its first civil penalties against Paragon (PRG) and Airfox (AIR). Each firm was fined USD 250,000 and is being forced to return investments to investors who choose the option. Most ICOs have lost money and if the SEC proceeds to take this action against the rest of the ICO market, it could lead to widespread bankruptcy of ICO companies, according to Pompliano.

This will have a direct impact on cryptocurrency hedge funds, since many of the ICO investments they have on the books could quickly go to zero. Pompliano said, “As both ICOs and funds begin to shut down, it is easy to see a future feeling of panic and desperation spreading across parts of the market.”

On a positive note, Pompliano thinks once the bear market runs its course the market will be in a healthy position to rebuild. Specifically, he said, “Remember, bear markets get rid of the tourists so that the true entrepreneurs can focus on building sustainable value. Watch closely for the founders who are quietly toiling away with talented teams right now.”

 

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New Report Cites Multiple Causes for ICO Funding Slump in Q3

In a new report by ICORating, ICO funding succumbed to a significant nosedive in Q3, dropping to 48% of its Q2 levels in 2018.

ICORating specializes in evaluating companies with a planned ICO. Their analysis is described by the company as being thorough and objective, reviewing companies as potential investment objects. The report revealed that in Q3 of the 2018 fiscal year that only 4 percent of ICOs managed to get listed on cryptocurrency exchanges, and more than half of the ICO projects declared that they managed to raise just USD 100,000.

Compared to Q1 and Q2 this year which saw Telegram and EOS raise over a USD 1 billion, this last quarter trailed with only one really significant fundraiser raising big numbers, – which reached USD 70 million. However, The London Football Exchange (LFE) did manage to feature in this year’s top 10 fundraisers’ list within the first 3 quarters.

LFE launched a cryptocurrency to power an ecosystem of “inter-related components” made up of sports, media, entertainment, finance and a foundation earlier this year, allowing “fan-driven” football community the opportunity to take part in various club and fan experiences.

According to the ICORating analysis, there were many reasons for the poor performance in Q3; overall, was that traditional ICOs were showing little promise as the year was drawing to a close. One peculiar reason cited was an increasing lack of transparency from ICO teams which tended to make investors wary.

Regulation has long been an issue and is only beginning to receive the attention it needs this year from jurisdictions in order to boost investor confidence in the aftermath of various scams and ICO frauds. This was cited as a significant investment determiner as potential investors become more knowledgeable and careful before making financial decisions.

The ICORating report also cited “an overall market downtrend, lack of new ideas from project teams and the not-so-fast pace of actual blockchain implementation in the traditional market,” as responsible factors in the current funding slumps in ICO investments.

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Ohio Congressman Tells SEC Hands Off Crypto

Ohio Congressman and cryptocurrency advocate Warren Davidson is to go ahead with his plans to introduce a bill which will effectively eliminate the SEC’s jurisdiction over the industry.

The representative for Ohio is also pushing for sensible cryptocurrency and blockchain technology regulations. He recently invited 32 prominent representatives of the cryptocurrency industry to Washington in order to discuss future ICO legislation. Davidson sits on the United States House Committee on Financial Services, which is responsible for overseeing the entire financial services industry, including the securities, insurance, banking, and housing industries.

The Bill will need to penetrate President Trump’s home guard in the House of Representatives and as yet Davison hasn’t named his co-sponsors. If passed, the bill would effectively create a situation where securities law would not be relevant to ICO as cryptocurrencies would be classified as products rather than securities.

Davidson is hoping for a bipartisan approach to getting the bill through, although the new Democratic majority is thought to have little effect in limiting the SEC’s regulations as they apply to cryptocurrencies. The Examiner commented:

“…[unlikely that the] incoming Democratic majority will get joyfully on board with any form, of crypto deregulation strategy, though the Congressional Blockchain Caucus has historically featured a bipartisan membership.”

Craig Phillips, the senior adviser to Treasury Secretary Steven Mnuchin, stated publicly on Monday that the department would be releasing its latest position on cryptocurrencies in the near future.

It has been noted that despite Davidson’s push for change within the SEC to combat its punitive stance on cryptocurrencies, startups have taken their own approach to sidestep rules through VC funding or raising by raising funds privately. Over the next few months, the SEC has several pending cases against cryptocurrency exchanges and ICOs.

CNN claims that this regulatory uncertainty could result in a decline in investor confidence, a fact which  Congressman Davidson and his supporters in Washington are fully aware of.

 

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Etherdelta Founder Fined $388,000 by SEC

In a landmark ruling for decentralized cryptocurrency exchanges, the founder of Etherdelta, Zachary Coburn, has been ordered by the United States Securities and Exchange Commission (SEC) to pay a USD 388,000 fine.

Etherdelta was until now among the top so-called decentralized exchanges. Its trading volume has crashed to USD 250,000 per day due to this news and it seems users have gone over to IDEX which now has USD 3 million of daily trading volume.

Etherdelta offers trading of Ethereum ERC-20 tokens, most of which are from initial coin offerings (ICOs) and can be considered securities by some jurisdictions, certainly by the SEC. The exchange did not have a license to operate as a securities exchange and Colburn is found liable for this since he created the exchange and operated it from July 2016 until it was sold to foreign investors in November 2017.

Coburn is being ordered to pay a disgorgement of USD 300,000, USD 13,000 of pre-judgment interest, and USD 75,000 to the SEC. The fines could have been heavier but apparently, Coburn worked closely with regulators and prosecutors.

This case sets a precedent where someone who creates the code for a decentralized exchange could be heavily fined by the SEC. This ruling could mean decentralized exchanges are considered illegal in the United States and therefore illegal worldwide. Even if a decentralized exchange tried to ban United States users, little could prevent enforcement scrutiny, as was seen with 1Broker, which was investigated by an undercover agent from the Federal Bureau of Investigations, paving the way for a lawsuit.

It would seem the only way to successfully launch a decentralized exchange is to retain full anonymity, extending decentralization to the hosting and management of the exchange hosting and software itself.

Bisq is a better example of a decentralized exchange, but still not 100% decentralized or anonymous. Most decentralized exchanges available fall short of true decentralization and autonomy, although that would be arguably impossible to create with today’s technology.

 

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Ethereum ERC-20 Creator Proposes Reversible ICOs

The creator of the Ethereum ERC-20 token standard, Fabian Vogelsteller, is proposing new technology which will make initial coin offerings (ICOs) reversible, meaning investors can withdraw their funds from the ICO at any time. This will give investors full protection, which would eliminate fraud. This new form of crowdfunding might be called RICO, which stands for reversible ICO.

The ERC-20 token standard is an easy, efficient, and secure way of launching a cryptocurrency via an ICO. A smart contract can be created with ERC-20, where investors send Ether to the smart contract and receive their tokens. This technology has led to USD 20 billion of investments into ICOs in the past two years and has been a boon for the entire crypto space. Unfortunately, a significant fraction of ICOs end up not delivering on their promises of new blockchain technology or in the worst case scenario, end up being outright scams.

Vogelsteller said he feels “obligated to come up with something better” since, without ERC-20, scam ICOs would probably be much harder to pull off and occur less frequently.

The proposed RICO would allow investors to send back their tokens at any time to the smart contract address and get back the Ether they invested. This would give RICOs strong motivation to deliver on their promises, instead of misspending the invested money, since if the RICO fails then all the money will be taken back.

Vogelsteller said, “You are able to withdraw the funds you committed at any point of time and you do this by simply sending back your tokens… It brings the balance back between the community and the project and I think this is really important.”

If RICOs are implemented, then catastrophic ICO failures due to mismanagement or fraud will become a thing of the past. RICO projects will fail naturally and investors will be safe, rather than ICOs hurting all the investors if they don’t deliver. This is good for companies conducting RICOs too since lawsuits would be less likely if a failure happens as investments would be automatically returned.

One aspect of RICOs that remains unclear is how there will be a balance between the company getting the funds it needs and the investors being safe. For investors to be 100% safe, companies that conduct RICOs would never be able to touch any of the invested Ether, which is probably not the way they would prefer to work.

Vogelsteller will demonstrate an RICO in real-life when he launches his fashion and design blockchain Lusko. At that point, the concept behind RICOs should become more clear.

 

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Security Token Offerings (STOs) Could Replace ICOs in the United States

Initial Coin Offerings (ICOs) became a popular way of crowdfunding money to launch new blockchain platforms, but the ICO industry is coming to an abrupt halt in the United States due to the Securities and Exchange Commission’s (SEC) declaring that ICOs are securities and subject to security regulations. Security Token Offerings (STOs) are similar to ICOs, but more likely to be approved by regulators. It is possible that STOs could replace ICOs in the United States, and could help fuel the crypto and blockchain boom.

ICOs are simply events that occur when a new blockchain platform or company offers their native cryptocurrency in exchange for major cryptocurrencies like Bitcoin or Ethereum, to raise startup funds. This model worked great before regulators stepped in, with USD 5.6 billion raised by ICOs in 2017. Since then the SEC has basically stopped ICOs in the United States. ICOs must be approved by the SEC, but at this time it does not appear that any ICO has been approved by the SEC in the United States.

A problem with ICOs is that they offer a newly launched cryptocurrency, often saying it is guaranteed or expected to have a certain value after launch. However, the free market decides the price of a newly launched ICO crypto, and there have been numerous cases of ICOs pumping and dumping, or never getting listed on an exchange and therefore never gaining value. The latter scenario especially happens in fraudulent ICOs which never come through with their promises to build a blockchain platform, and essentially run away with the crowdfunded money.

STOs offer a new crypto like ICOs, except each unit of this new crypto represents a share in the company conducting the STO. This gives investors a guarantee of equity or dividends, as well as voting rights, whereas ICOs give investors a cryptocurrency that has no guarantees or rights attached to it. Polymath originally came up with the idea for STOs, and has created a platform that guides STOs through the complex legal and technological steps to successfully launch a legal STO, including know your customer (KYC) and anti-money laundering (AML) requirements.

While ICOs and STOs both fall under the SEC’s jurisdiction as securities, STOs are actual financial securities and built in a way that makes them much more likely to be given approval by the SEC, since they are a better fit for security laws framework. Essentially, STOs will give United States blockchain and crypto firms an avenue to crowdfund in a similar way to ICOs, as well as offer better protection for investors, and STOs could replace ICOs in the United States.

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Lithuania Probe: Some Euro Banks Cited for Trading Big in Crypto

A government probe in Lithuania into the activities of private individuals and cooperate bodies has revealed that major European banks have been facilitating large crypto-fiat deals.

The country’s Financial Crime Investigation Service (FCIS) has been investigating activities which are reported to have happened over a period of two years. This investigation mainly concerns large trading transactions, some running into the millions of euros traded for cryptocurrencies and through European banks.

The investigation was part of a national analysis of financial activity, in order to examine the direction of money-flow in Lithuania’s financial system. The information was gathered by the FCIS from sources such as the Central Bank of Lithuania and government departments responsible for electronic fund regulation.

The FCIS found that some major financial institutions such as Danske Bank and Swedbank conducted business for their clients running into millions of euros. The next step, according to the investigators, is to find where the money originated, with 7 banks trading cryptocurrency worth €661 million. The three largest transactions handled by the banks were valued at 27.2,16.6 and 14.1 million euros

FCIS director Mindaugas Petrauskas reported that one Lithuanian resident recorded a profit from cryptocurrency trading of EUR 60 million, commenting, “The question arises as to where does it come from, that’s a lot of money.”

There has been a significant increase in funds raised through ICOs since 2017 with funds raised rocketing from EUR 82 million in 2017 to EUR 500 million in 2018 so far. The FCIS is concerned principally with money laundering aided by the anonymity of the transactions with wallets often located overseas. Petrauskas indicated that the investigation is in line with the current recommendations proposed by the Finance Ministry at further ICO regulation.

The Lithuanian Minister of Finance recently suggested that the country was in the “middle of an explosion of ICOs and blockchain based projects”, as the ministry published a guideline document which covered information for investors regarding ICOs and taxation.

The country has recently become a growing center for ICOs and crypto projects. Latest figures show that Lithuania is now attracting an impressive 10% of all global ICO investments, with cryptocurrency bringing in half a billion euros from such activities.

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VC Funding for Crypto and Blockchain Records 280% Annual Growth

Venture capital (VC) is fast becoming the new way to invest in blockchain companies outstripping ICOs, according to a new study.

VC investments generally come from hedge funds, private equity firms, or persons of extreme wealth, with the resources to invest funds into start-ups with the hopes of quality returns on the original investment.

The new study conducted by Diar, the weekly institutional publication on digital currency, assets, payments and regulation, suggests that the impetus has clearly shifted with VC companies now pouring their money into projects at a rising rate. VC research platform Pitchbook confirms that within the first nine months of 2018, USD 3.9 billion has been raised for VC blockchain enterprises, a 280% rise on the previous year.

The growing interest by venture capital companies in blockchain projects, juxtaposed against a diminishing number of ICOs, thought to be a result of government intervention and stricter rules being enforced on crypto startups who get their funding from ICOs.

The data also shows that the size of VC investments has gone up with the frequency, with median size of deals increasing over USD 1 million in this year alone, showing that as confidence in the industry grows, so does the preparedness to take a higher element of risk. The most active VC investor with 110 deals related to crypto and blockchain is Digital Currency Group (DCG), followed by Blockchain Capital and Pantera Capital with 100 deals.

On the heels of this latest news, Bitcoin News reported yesterday that South Korea’s largest VC company announced investments in TEMCO, a blockchain solution company for supply chain management built on the EOS network.

Korea Investment Partners (KIP) of Seoul has investments in over 50 companies, 20 private equity funds and a significant roster of partners all over the world. Its investment into TEMCO is of undisclosed value although according to a press release, it claims to be the first ICO funded by “major venture capital”.

In terms of where the new wave of venture capital is going to, reports suggest that the US, UK, and Switzerland top the list.

 

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Token Grab Still on in China Despite Ban

China has a ban on crypto and ICOs but the Chinese crypto enthusiasts keep on coming, with tokens available for those that want to flout state rules.

ICOs banned in China are increasingly coming under pressure and most of the big names have set up overseas to avoid becoming entangled in complicated prohibitive regulations. Thus, any advertising relating to ICOs is quickly jumped on by the authorities in an attempt to eradicate them from mainland China.

Clearly, the way to survive the ban is to do your business quietly, which is what many investors have learned to do, ensuring that their crypto life goes on as normal. The latest method to circumvent rules and buy tokens is for buyers is to log in on a platform for over-the-counter (OTC) transactions, where WeChat, Alipay or bank transfer mainstream currencies are readily available. Even setting up an ICO is possible if you know how, according to local media, as many Chinese companies are setting up overseas.

Despite the obvious continuation of trading and increase in peer-to-peer activity, the Chinese government recently called its a ban a “success”. Zhang Yifeng, a blockchain analyst at the Zhongchao Credit Card Industry Development Company, commented on recent government data which suggested that Chinese yuan (CNY) was currently being used in less than 1% of crypto-trades:

“The timely moves by regulators have effectively fended off the impact of sharp ups and downs in virtual currency prices and led the global regulatory trend.”

However, the word “success” may be purely subjective on this occasion, seeing that the ban drove out Binance, one of the world’s largest cryptocurrency exchanges, along with other hugely “successful” platforms, taking along with them an enormous investment pool.

With the latest revelation that the Industrial and Commercial Bank of China (ICBC) intends to focus on developing blockchain technology, China’s blockchain growth goes from strength to strength regardless, and this is clearly where China sees its future regardless of any later decision they may take on lifting the current crypto ban. Financing events this year have involved far in excess of CNY 6 billion, with over 10% of blockchain businesses being able to obtain more than CNY 100 million yuan of financing to further develop their enterprises.

 

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China Central Bank Vows to Crush Foreign ICOs Targeting Chinese Investors

At a meeting for the Internet Finance Rectification Working Group on 9 July 2018, the Vice Governor of the People’s Bank of China (PBoC), Pan Gongsheng, had harsh words for foreign initial coin offerings (ICOs) that are targeting Chinese investors. He said, “Any new financial product or phenomenon that is not authorized under the existing legal framework, we will crush them as soon as they dare to surface.”

China banned ICOs and trading cryptocurrency for Chinese yuan (CNY) in September 2017, causing almost all cryptocurrency companies to flee the country including top exchanges Binance, Huobi, and OKCoin. Hong Kong has become a haven for cryptocurrency activity since that time since it has an autonomous government that has decided on more favorable cryptocurrency regulations.

According to Pan, individuals and organizations that are now “running abroad” are still doing business with Chinese residents, which is illegal and prohibited. The Internet Finance Rectification Working Group is tasked with enforcing decisions of Chinese regulators. Clearly, they are being pushed by Pan to use their full power to combat investment in foreign ICOs.

It is unclear how the Working Group will crackdown on ICOs. Due to the decentralized nature of cryptocurrency, even if cryptocurrency is fully banned there is no way to stop Chinese residents from using it, including the use of cryptocurrency to invest in ICOs. It appears one tactic Chinese regulators are using is monitoring messaging apps like WeChat to spot cryptocurrency traders, and WeChat has limited the amount of money that can be sent through their payment service. Also, popular online forums like Zhishi Xingqiu have become an access point for ICOs to reach Chinese residents, and these are being monitored as well.

 

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