The initial coin offering (ICO) has emerged as a corporate financing trend just as volatile as many of the cryptocurrencies themselves. Earlier this year, CoinDesk data revealed more money was raised via ICO in the first quarter of 2018 than in the entirety of 2017, totaling $6.3 billion raised in those first three months.
However, Autonomous Research recently released its own data that may signal a slump in ICO, noting that a mere $326 million was raised in August — significantly down from the $1.5 billion raised via ICO in July.
It marked the first drop in ICO funding in more than a year, according to Bloomberg reports, citing a correlation between ICO funding declines and drops in cryptocurrency values. Ether, for instance, seems to have dropped in value, just as many organizations that had previously raised funds in Ether via ICO “cash out” so as to finance their operations and pay for expenses, Bloomberg said.
This week, U.S. Representative Warren Davidson (R-Ohio) is hosting a “Legislating Certainty for Cryptocurrencies” roundtable, with financial firms, venture capitalists (VCs) and cryptocurrency companies all gathering to say their piece on the shaping of crypto regulation. Reports in CNBC said Davidson described the existing legislative framework in the cryptocurrency market as “sloppy,” and invited industry stakeholders to participate in the roundtable in an effort to “preempt a heavy-handed regulatory approach that could stall innovation and kill the U.S. ICO market.”
The ICO can undoubtedly be a lucrative source of funding for companies. However, firms that choose this path often go it alone, navigating cryptocurrency volatility and regulatory uncertainty without access to advisors and other support.
“There is a big gap in the market,” says David Siemer, founder and CEO of Wavemaker Partners. He is also CEO of his new venture Genesis, a company formed to provide consulting and asset management services in the context of cryptocurrencies.
Not only do the founders of projects raising funds via ICO rarely have a background in treasury management, but the nature of the current crypto ecosystem means these innovators need guidance, Siemer told PYMNTS in a recent interview.
“Bottom line: Projects raise money to build a product, not to speculate on the prices of crypto,” he said. That volatility is an important consideration, given that most of a blockchain or crypto startup’s expenses will be in fiat currency, Siemer said. Organizations that hold onto their Ether (ETH) or bitcoin (BTC) after an ICO are greatly exposed to that threat of volatility.
“We’ve seen some ICO project treasuries fall by 80 percent or more, resulting in significantly less runway for building out their product and business,” he continued. There’s also the major challenge of access to bank account services for companies with significant volumes of cryptocurrencies.
Traditional financial institutions (FIs) have been historically reluctant to bank companies managing cryptocurrencies, particularly with regulations surrounding the crypto ecosystem largely undefined and unclear. It’s another gap in the market giving rise to FinTech firms addressing this issue. (One startup, Bitwala, announced this week that it raised $4 million to provide traditional banking services for cryptocurrency, signaling at lease some interest among traditional banks to work with crypto).
In addition to these hurdles, Genesis President Cory Klippsten told PYMNTS that there are a range of other issues that companies face when they lack advisory services for their crypto operations or following an ICO.
“Crypto is very different from the traditional startup world,” he said. “Everything is open source, meaning that any feature in a public blockchain can be copied.”
He touted the network surrounding these projects as a “paramount” priority for companies.
“Most blockchain startups are protocols or platforms, so they have a community to build before they even get to end users,” Klippsten continued. “They are essentially engaged in ‘platform wars’ from the word ‘go.'”
Furthermore, many of these projects raising funds lack the resources and internal staff to manage that pressure or other more typical challenges, like marketing and branding.
Both Klippsten and Siemer emphasized that these hurdles will persist and evolve for crypto and blockchain startups, even as the market shifts toward legitimizing cryptocurrencies. Siemer pointed to Goldman Sachs‘ consideration to offer custody for cryptocurrencies, according to unnamed sources in Bloomberg last month. This followed the formation of Komainu, a custody consortium formed earlier this month, which includes top traditional FIs such as JPMorgan Chase and The Bank of New York Mellon.
As the traditional financial services (FinServ) market continues its exploration of custody and other crypto services, and as FinServ regulators consider how to protect investors and innovators without stifling innovation, crypto firms are going to need guidance as they navigate the industry and raise more funds via ICOs.
Genesis plans to offer a “full suite of treasury management services,” including audit and tax reporting, investment management, and custody and liquidity services for the industry. According to Klippsten, adequate treasury management that can handle the unique challenges of the crypto market won’t only be essential for the new market entrants.
“Assuming crypto will be an accepted payment system, corporates will need to handle their exposure to their clients in payments and other aspects,” he said. “On top of that, their clients’ crypto exposure will also affect decisions made.”