30. March 2018

"The blockchain technology is a big revolution; comparable to the invention of the internet protocol"

At the moment, the blockchain industry is at its beginning - meaning it shows potential but it is still quite chaotic. That's the problem why so many people have a negative perception of the industry. Read here the transcript of Stefan Heilmann's keynote about "Demystifying ICOs".

Blockchain, ICO’s Initial Offerings and Tokens

AT THE MOMENT, WE ARE ALL to believe it is a huge opportunity working with ICO, Blockchain as a Technology and all spaces associated to that. But there are also risks and fears associated with that. Only rarely banks touch that matter. We have a huge problem of custodians.  If you have an institutional investor, who is not sure oh how to hold the coins. There is no solution for that. Rabobank just announced that they will do this on an institutional level but if you go to an institutional investor – he has no clue how to hold your coins and tokens.

So, why is there a negative perception for that technology?

NOW THERE IS NO KYC, THERE IS NO AML. We have no valuation models of any pre ICOs. There is no valuation method which makes it plausible for you how much you pay for a Utility Coin? I don’t think there are answers for these questions. That is the problem. So, we must learn how to value those asset classes. It is a white paper industry. There is not a lot on it. It is a concept. It’s the early 90s, mid 90s concepts. As an example:   I have a great idea. I think I want to create a browser. Does it make money? No. Will it make money? No. What is it good for? Hm… I don’t know. Of course, this is exaggerated. There are many people in this business with lack of execution experience. That makes it risky. You put a white paper in front of an investor and says: I can execute this in one year. When questioning the level of experience often it goes like this: Have you done it before? No. Have the people done it before? No. Have you run a business before? No. Have you done sales? No. Have you every market share or any asset before? No. So, if you are an investor with your own money or even with a third party’s money – how   would you react?

ANOTHER POINT TO NAME IN THAT REGARD is the questionable marketing activity. It’s a social media (i.e. Google Online Adword Business) of how to reach investors. Thinking that through – it means, the focus is on retail investors. Which is questionable. To be honest, I do not see a lot of investor education and risk awareness at the moment. It is increasing right now. But before, there was none. Not even a single page is included about this topic in the white papers in 2016 and 2017. That can easily go south, especially regarding the founders because when lawyers get involved. Imagine the money is been lost and they start suing you civilly on the civil court. There will be no caps or limitations. To sum up: We have the “Gold Rush” mentality of 1994/1995 – which is good. But these are generally the factors of why so many people have a negative perception.

Intrinsic Parameter to be “Abused”

THEREFORE, LET US FOCUS ON THE MORE POSITIVE sites. It’s the biggest revolution after the invention of the Internet Protocol. The IP was solely created for the transfer of information, not for the transformation of values and it was not meant to enable an identification of counter parties. Blockchain is bypassing middlemen. It is directly transferring values where the counterparty has been secured as is the transfer of value. Which is revolutionary. Which will change our entire life for the foreseeable future. So, the underlying technology is probably the biggest revolution and we are just at its beginning.

TRUST THROUGH TECHNOLOGY! Imagine explaining the older generation that they have to transfer real estate for example via blockchain. This is a difficult matter. Therefore, it is necessary that people need to train, explain and make it more reasonable that blockchain will replace the old and used methods of transferring values. NO AML and KYC. As mentioned before. This will always be a risk as it attracts old dirty money. It is unregulated. So, you have no clue about any protection of your money or your investment – which is generally not good. It is still a global retail inflated business (i.e. retail investors, end consumers). When it works out well, all is fine. When the market gets bumpy, they are all gone and sue you. So it is still rather difficult.

HAVING SAID THAT, LET ME BRIEFLY talk about a more fun part of Blockchain – the Jesus Coin. Its been issued, its been traded. It is a promise to forgive sins and fight corruption once you acquire the coin. Another example the Kodak Coin. There was a huge hype about an old legacy company, issuing a coin based on a white paper for which there is no real business model behind it. But it has worked for them with peaks early 2018. However, when the delay of the white paper was being announced, the stock dropped 40%. So, you see the sensitivity in the market for delivering or not delivering your promise.

From Anarchy – Monarchy: Transition from 2017 to 2018

SO, WHERE DO WE STAND TODAY? Last year, 2017, all the ICOs I have seen were Ethereum based, except for one and that was Stella. For the good and the bad. Mostly utility tokens which is basically due to regulations and the fear to securitize that. Whitepapers did do the job. That was all. Additionally, to the whitepapers, there were also tech descriptions, but this was it. Governments and regulators were pretty much on the sideline and completely overrun by the new technology. They were not catching up with how fast the market was developing. Exchange platforms were more and more hacked – whether in China, whether in Europe or the US. None of these exchange platforms were regulated or registered with their local regulators, i.e. the SEC, the FINRA, The MAS in Singapore. This is a big problem by the way. And banks completely were completely sidelined shied away and were not even interested to service the ICO. If you do an IPO, the banks do a lot of the services for you: custodian, transfer agent – all the components which makes it possible to share value via a share or coin. They say we are not doing it - even Singapore. I am not sure about Japan. Here I am blank but no one in the US want to do it. Now a private Swiss Bank offers these services and Rabobank out of Holland. 2018, however, will be an absolute life changer for this industry. Why? Because there are new blockchain technologies on the horizon, i.e. we will have to make a decision whether we have a proof of work based technology (Bitcoin, Ethereum – that require mining privately and an immense amount of energy with the consequence that transactions are slower) or proof of stake based technology (i.e. Stella, which check randomly the likelihood of the righteousness of the transactions. There are different philosophies. And whichever one you believe in; we are just at the beginning of how blockchain platforms will look like. Ethereum as if it is today, will not survive. Bitcoin, unless it gets the gold status, will not survive. So, the new forks, which will be enough and get manage more smart contracts per second (i.e. hundred thousand and above) will probably prevail in the future. And you see it already today.

SECURITY TOKENS ARE TO COME. First, I think we will see asset backed securities or tokens that will happen. Legislation is still a bit bumpy, there are a lot of open questions. PPM (Private Placement Memorandum) out of the old world will be worked on in an analogy. Why? Because the risks associated to ICOs will be larger and larger once you see regulations kick in. Regulators will step in, as mentioned before already. KYC and AML will be mandatory in 2018 no matter where you live. Security stacks increase which is already taking place now. All exchanges will require a license in their legislation which will be ATS in the US. And, most importantly, what will happen, and I think this is good news, Blockchain will become an institutional player. Institutional investors will go into the markets. They will look into certain exchanges which are regulated. Banks are slowly adopting to the business. So, we see a lot of things happening in this sector. Why is that so important. Because the money that is now within the industry, will be 10 times, 100 times as intensive once it is institutional, compliable asset class. Very important for all of us, no matter on which site we are.

3 Types of Tokens

WE AS A INVESTMENT BANKING BOUTIQUE, we don’t look at Crypto Coins as a currency itself. We don’t understand the volatility, especially the risk underlined with it. Therefore, we as a bank do not invest in it. However, we contribute in making it more transparent. The utility token functions as voucher. You basically vouch something to your customer client to finance an early stage situation. It is a new asset class and it is a good asset class. We are very happy that this exists. So therefore, we react quite negatively when we are confronted with the black sheep of the industry. They screw up the reputation as well as the professionalism of decent business models in the utility coin/token industry.

IN THE US, IT IS A BIT TRICKY at the moment because they have not decided whether a utility token will be a security token. If that is the case, you will undergo further and harder regulations. In other countries (i.e. Gibraltar) they look at this in a different way. Switzerland – at the forefront – absolutely understands the concept of Seed Financing and treat exactly that regulation with a risk return profile associated to that. So, I would probably say for me, that is the master of regulation at the moment. Security tokens are digital shares. I believe that is the bright future. If we can find an efficient way to enable a tokenized, fractional ownership of your company, your goods, your revitives or of your services, stock exchanges such as Deutsche Börse or the New York Stock Exchange, the NASDAQ or the EUREX  will disappear within the next ten years. Security tokens will completely disrupt them.

Tokenization of Real-World Assets

THIS CONCEPT IS RATHER PROMISING. At the moment, we face big issues – both on the technological side but also on the regulation sides: How do we treat in regard to transfer agents. This is rather tricky but can be solved jointly. We are testing it at the moment in Germany as we are tokenizing a pool of art and real estate on a very small level and test how it feels. By doing this we are focusing on questions such as:

  1. How do we hold the tokens?
  2. Who do we have to inform once we sell it?
  3. What is the tax implication?
  4. What is the text style behind it? As this is a small contract shall we base it on Ethereum and ERC 20 or should we rather switch to  Stella or NEOs.

ICO Evolution

WHAT ARE THE MARKETS WE SHOULD FOCUS ON? If you are interested in doing an ICO, there is no way you can avoid the US. There is also no way you can avoid Russia as most of the capital comes out of Russia. Number three will already be Singapore which is becoming more relevant as they are doing more and more projects. In regard to ICOs there is an interesting statistic: In 2017, ICOs were 3,5x larger in terms of capital than the venture world. That is big and it is a proof that it will not go away.

ICO Regulation by Country

IF SWITZERLAND WAS LISTED HERE ( which it is not), it would be green and marked as very favorable in terms of regulation. The US is getting orange as we speak because regulations are kicking in, which has a major impact on the entire value chain: exchanges, ICOs, services suppliers (i.e. Investment Banks). Gibraltar is a very interesting place to look at and all countries in South East Asia that are dealing with the matter turn quite favorable as well. Just for your information and by our Investment Banking experience: Every month there are 20 companies approaching and asking us whether we can support them to do a Swiss/American duo-listing ICO- This will be very interesting in the future – having European investors out of European regulation on the one and the same for the US perspective on the other side.

Regulated ICO – Example USA

ICOS IN THE US ARE BITCOIN OR ETHEREUM BASED and 90-95% are ERC-Standard. Within the last year, there was one Stella ICO: They normally utilize small contracts – so they use Utility Tokens. The token incorporates the rights and entitlements which means that the token functions as a decentralized digital register. ICOs in the US is a private placement and not a public placement. That is very important to keep in mind. You do not want to go into a public placement because that area is highly regulated. In this case it is most likely that the tokens will be regarded as securities. The final decision that lies with the SEC or FINRA has not been made yet.

FOR ICO ADVISORS THERE IS ONE MAJOR aspect that needs to be considered at all times – If you issue coins in the US, the ICO needs to be regulated there. That means the advisors need to have a broker license in the United States. Without it and if they receive money, you can reclaim it. Already today. There is no way around it and they can not talk themselves out of it. It is against the law.

But how do you conduct an ICO in the US?

  • Reg A: Mini IPO
    • You can include credited and non-credited investors
    • It is limited to either USD 20m or USD 50m
    • No lockup
    • Small-Scale IPOs
    • Heavily regulated
  • Reg D 506c: Tailored to ICOs
    • Only do accept accredited investors
    • More stable against fraud and money laundry
    • Unlimited
    • Lockup à when you receive the coins, they are locked for 12 months and cannot be traded so easily
  • Reg CF: Stands for Crowd Financing
    • Small issuing in a crowd
    • Limited to approx. USD 1m
    • Each individual investor needs to provide certain income and can only invest 10% of that
    • Investor needs to show proof to the SEC (rather complicated matter)
  • Reg 5: Raise Money with foreigners
    • In that case it might make sense to switch markets and their regulation laws if the majority of the money comes from foreign investors or markets (i.e. Gibraltar, Switzerland or Singapore)





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