Funding for small and medium-sized businesses has always been precarious. The established sources such as banks are reluctant to lend money to start-ups, and demand excessive personal collateral from owners. Venture capitalists focus their interest almost exclusively on high-tech firms and make it difficult for entrepreneurs to raise capital for attractive but not technologically advanced businesses. Fortunately, the internet has come to the rescue with new funding sources such as crowdfunding and fintech, which offer peer-to-peer opportunities. Add to this fresh fountain of liquidity the introduction of blockchain systems. They issue cryptocurrencies in the form of digital coupons or tokens, such as bitcoins and ether, which can be used for trading and investment. These tokens are produced on an indelible, distributed ledger called the blockchain. The ledger is safeguarded by independent miners, who record and trace all transactions. This creates a more transparent currency trading system that provides a higher degree of transactional security.
There is a new wave of investment vehicles that are centered around these “token sales”. It is referred to as Initial Coin Offerings or ICOs – a play on Initial Public Offering or IPO on the normal stock exchanges. This has gathered steam and has rapidly escalated into a vast multi-billion dollar market in a relatively short time frame.
The name blockchain stems from the fact that the system maintains a record of the bitcoin purchasers right back to its initial launch. New transactions are added to the existing ones, forming a continuous chain of transactions. Many investors like the idea that the blockchain system requires no support from the government or central reserve banks that issue fiat currencies. It also displaces banks as the trusted intermediaries between buyers and sellers. Banks see this as an existential threat and are moving to set up their own secure blockchains.
Although bitcoins and other cryptocurrencies have had a rather topsy-turvy ride recently, it is the technological breakthrough that fascinates and encourages the ever-increasing new entrants into setting up their own ICOs. Many of them like the idea of having their identities protected but having everything else totally open to the public. Exchanging cash to bitcoins or other forms of blockchain currency has been facilitated by online companies operating from websites such as coinbase.com and localbitcoins.com. While the rate of exchange has been quite volatile in the past, it has recently stabilized as people gain more confidence in the whole blockchain concept. The fact that established banks see the blockchain system as possibly safer than the online transfer of funds currently in use, is a huge endorsement for the future of this nascent form of currency. Banks lose billions of dollars every year through fraudulent electronic transfers or hacked accounts by international cyber gangs.
Many experts predict that independent cryptocurrencies such as bitcoin and ether can, and most probably will be incorporated into the existing commercial banking system. They view this as an eventual melding of electronic and digital currency.
The new system continues to be plagued by speculators who are purportedly using laundered money. While this is probably true, it is also safe to say that established banks have also been tainted by money laundering. All revolutionary systems will be tested in one way or another by both honest participants and those that seek to game the system for their own nefarious advantage. In order to combat the latter, and raise its profile, more ICO’s use escrow accounts, which makes it harder for someone to disappear with the money. Another safeguard is to have the issuing company guarantee compliance with anti-money-laundering regulations that apply to normal banks.
Government regulators are moving in to analyze and implement rules that will ensure more security for participants. Securities commissions in some countries are demanding that issuers of ICOs meet legal requirements. While blockchains know no borders, a more regulated environment will make them more attractive to a wider user base. There is no doubt that ICOs help finance projects that were difficult to fund in the past through established channels. This is one of the reasons that they will sooner than later become a normal channel for funding of businesses of all sizes.
The early bitcoin investors made a lot of money and have the means to invest in new projects. This is a group that, unlike banks, is willing to take more risks. A company that can put together an intelligent and convincing business plan has a good chance of gaining attention from this unconventional pool. In many cases ICOs allow investors to monitor progress on a regular basis through financial reporting and videos that provide transparency and openness. For businesses with powerful new technologies and online marketing savvy, blockchain systems are well worth investigating.
On the whole, it is exciting to see a widening of funding sources for businesses of all size in the internet age. This cyber currency is gaining ground on the recalcitrant old banking system. Its obvious synergy with the digital evolution bodes well for the future. It may not yet be the right choice for every entrepreneur or private individual, but it is still worth learning about cryptocurrencies and viewing them as another financing option. With time, control mechanisms and regulations will filter out the unreliable and untrustworthy companies and make the whole system much safer for the general public and small businesses.