The Cryptocurrency Economy: ICOs, Blockchain, Financial Inclusion

The global economy is going through a fast growing and highly disruptive stage – The cryptocurrency economy

Innovative technologies have fostered the emergence of P2P digital platforms driven by cryptocurrencies, which are shifting the very internal conventional foundations of economics as we have known it for the past 100 years.

As corporations, organisations and governments undergo this change, most of them are not ready for the powerful disruptive waves going through the economy and society in general. Part of this revolution is based on the way we look at work and the structures supporting our current systems. In this article, I will be looking at how we are swiftly embracing the cryptocurrency economy by reinventing what we see as money through blockchain, AI, and IOT. I will explain how the cryptocurrency economy is democratising investing and how it can further help the inclusion of millions of people in the financial system.

Blockchain technology has been subject to intense attention since it started less than a decade ago with the invention of bitcoin. In 2015, Wired magazine described how blockchain would revolutionise the way we look at money, in the article “blockchain 2.0: the renaissance of money.

Contrary to what most people think, Blockchain has been around for a while. Roger Wattenhofer from the Swiss Federal Institute of Technology highlighted that “Blockchain technology has been around since the 1970s and can be distilled down to two main ingredients:

  • Asymmetric cryptography- military grade security to store data that has yet to be hacked or broken into
  • Distributed systems-not reliant on one central computer”

With Blockchain one is able to:

  • Create records and record all transactions that have taken place
  • Transfer value on a peer to peer basis globally
  • Automate records and actions- thus digitising many tasks and jobs

Blockchain became better known in 2008 when it became the distributed ledger behind Bitcoin. Fast forward to 2017, cryptocurrencies are now driving the world dynamics. Bitcoin and Ether, another important cryptocurrency, take the world by storm!

The blockchain revolution will change everything. Presently, it is the second most important technology, second only to artificial intelligence (AI). Whether we like it or not, we will soon be living in a world run by cryptoeconomics.

Vlad Zamfir, of the Ethereum project, defines cryptoeconomics as follows:

“A formal discipline that studies protocols that govern the production, distribution and consumption of goods and services in a decentralized digital economy. Cryptoeconomics is a practical science that focuses on the design and characterization of these protocols.”

As this is happening, we are facing a lot of challenges. Many governments, including big nations such as India, remain non-committal and neutral to bitcoin and cryptocurrencies. Others, such as Japan, have embraced them and made them legal, while other governments such as Venezuela have cracked down on cryptocurrencies by rendering them illegal.

Is it because governments fear that cryptocurrencies can destabilise a highly regulated financial banking system or their national currencies? Governments’’ reluctance is understandable, as the bitcoin ecosystem has been compromised in the past — the Mt. Gox scandal being a case in point.

However, the bitcoin/blockchain protocol in itself has never been compromised. More than bitcoin, it is the underlying technology -blockchain- that is showing promise. Besides companies, governments are warming up to the potential of this technology across sectors.

How Blockchain is disrupting the venture capital industry: ICOs – The cryptocurrency economy

An example of how cryptoeconomics is disrupting the mainstream world is how it is affecting and democratising the venture capital industry.

In an interview with influential thought leader and VC Brock Pierce, “Why this venture capitalist wants to make traditional VC obsolete IPO” Pierce says:

“Venture capitalists have been investing in innovation and disruption for a very long time, but as an industry they rarely innovate themselves. If you’re in the blockchain or bitcoin space, our view is that we’re trying to decentralize the world, we’re trying to democratize the world in a way that creates a level playing field where everyone has equal access. Crowdfunding was the first major leap in the democratization of the world of early-stage finance. I believe the tokenization of it—what we’re doing—is the next, even larger leap. Since I’m a VC, and I believe in the concept of disruption, and of disrupting yourself—you know, someone can come and do it to my business, or I can do it to myself—I hope to put the GP/LP structure out of business. That is my goal over time.”

He further stated that “ICOs will have an impact on many industries. It is not just venture capital: it is private equity, it is real estate. All of these illiquid asset classes are going to be soon disrupted by this model and this is going to happen in the industry that provides the technology.”

This mutation is operated by a convergence of the financial technology, mostly blockchain, cryptocurrencies and decentralised systems. An example of this disruption is the new trend of ICOs.

ICO stands for Initial Coin Offering. An ICO is an event in which a new blockchain project sells part of its cryptocurrency tokens to the public in exchange for money today. ICOs enable the cryptocurrency project to raise money for its operations. Most ICOs raise money in Bitcoin or other cryptocurrencies.

Image source American Banker

ICOs are more and more frequent as innovators in the industry are:

  • creating liquid venture funds,
  • allowing access to a broader group of investors,
  • investing in the trend of start-ups doing ICOs (initial coin offerings)
  • showing these start-ups how to do it compliantly

ICOs “investments” are here to stay and it will be partly how startups will be financed in the future. Historically venture capital funds have only allowed elite investors in. So one merit of ICOs is they allow small investors from all over the world to participate.

The crucial question is then how this will be regulated. Most people doing ICOs today are creating very convoluted structures aiming to be both innovative and lean, while circumventing complex securities law.

ICOs are a new means of raising finance and are therefore fragile. This is the reason why it is urgent to add substantial regulatory overhang. Rather than circumventing regulations, innovators and entrepreneurs have to ask themselves: “Is this something that can be done within the rules? Can we do this compliantly?”

A few governments have tackled this question. In 2014, the Monetary Authority of Singapore gave some guidance around how to create tokens, i.e virtual currency. Sooner or later more governments will follow the example of Singapore.

3. How the Ethereum platform is used for an ICO – The cryptocurrency economy

Ethereum is considered the perfect app to do an ICOs. Ethereum is being used frequently and successfully for doing a crowd sale and getting the tokens in the investors’ hands. Over 80% of the ICOs are happening there today, so it might be the platform to finance the startups of the future.

Brock Pierce, who is doing a Blockchain Capital’s $10 million fundraise through a monthlong crowdsale, is using Ethereum blockchain, to automatically distribute to investors the tokens they have bought. Each token will represent a fractional ownership in the new fund. This will be the first time a VC firm takes part on a ICO.  He says:

“One can invest in a crowd sale using a combination of bitcoin, Ether or fiat money. We can accept wire transfers and things of that nature. I’m not aware of anyone else who has done that. The reason why no one took government money previously was out of concern for being labeled a security. We’re admitting that we’re a security. We’re the first ICO that’s KYCing anything. We’re the first ICO that is compliant. We’re the first ICO of a fund. We’re breaking the mold on many fronts.”

He further explains, how the process works: “The Ethereum smart contract says, “I’m investing one bitcoin, ‘let’s say it’s worth $1,000’, and at the end of the crowdsale I get $1,000 worth of that token.” The smart contract is actually doing issuing the token to the investor. Instead of having the [chief financial officer] send you share certificates, the smart contract sends you tokens that represent the security in that same company.”

Many people are still fearful of ICOs because they think that its a field that is not really regulated. In the following video, Andreas M. Antonopoulos, a technologist and serial entrepreneur who has become one of the most well-known and well-respected figures in bitcoin explains some of the problems and merits of ICOs:

Some governments, as I mentioned previously, are beginning to regulate the field though and whether we like it or not, the disruption to the way people invest and fund their projects is happening at a fast and furious pace.

The Future of Money and Investment, and how it can help tackle Financial Inclusion – The cryptocurrency economy

As the global economy becomes increasingly digital and the crypto economy grows, there is the need of aligning the use of tech for inclusion and financial empowerment.

In many emergent countries, the use of mobile phones is high, and this trend is growing everyday. In Sub-Saharan Africa, of the 350 million adults who don’t have a bank account, 155 million are reported to own a mobile phone.

Almost half the world — over three billion people — live on less than $2.50 a day. At least 80% of humanity lives on less than $10 a day. More than 80 percent of the world’s population lives in countries where income differentials are widening.

Although the use of smartphones is now major around the world including in emerging markets the use of tech for good is still limited and fragile. But the trend can be reversed.
How can the crypto economy, blockchain and other fintech innovation, help the inclusion of 350 million unbanked people ?

Of the digital technologies that are of particular focus and interest to solve the inclusion of the unbanked in the financial network, are Blockchain-based digital IDs, hybrid blockchain based platforms for low cost payment solutions, biometric based ID solutions, mobile-based solutions and Internet of things (IoT) banking solutions. A few of them have already become working models and have being deployed in the field, such as humaniq, which is an Ethereum-Based app aiming to deliver Banking 4.0 to 2 billion Unbanked people, using biometrics to solve the problem of digital identity.

Blockchain can for example help in the area of blockchain based digital identity, as one of the main problems that needs to be tackled is the lack of identity papers of many unbanked people.

There are a few projects like BitNation, Credits.Vision, OneName and ShoCard that have been experimenting with digital identity through a blockchain protocol, but we still need many more projects as this is a crucial issue. ID2020, is a project with a broader scale, that aims to implement a global digital identity system.

They advocate that every person on the planet can access a unique digital identity as part of their basic human rights. It consists of a consortium of stakeholders from governments, private sector and nonprofit organizations dedicated to using an open source platform for developing a “back-end” identity exchange layer needed for a globally useful digital identity system.” Such an approach will help to ensure there is interoperability between existing and future systems.

Another example of a successful use of technology to expand financial inclusion is the very popular mobile based payment solution called M-Pesa. It is broadly used in Kenya and Tanzania. The service was launched by Safaricom and Vodacom in 2007 and has been proven a success in facilitating payment transfers in a cost effective and sustainable way.

M Pesa landscape in 2013

Going where no one has gone before – The cryptocurrency economy

The cryptocurrency economy has the potential to revolutionise completely what we understand as money and the economy. From democratising investing, by allowing average people to invest in projects, to further help the inclusion of the unbanked in the financial system, its possibilities are immense.

Key areas that need to be tackled urgently include legislation, digital rights protection and the development of safe digital identity systems. Even if lots of issues will need to be solved along the way, as the journey progresses, through trial and error, I firmly believe that the revolution in course will bring benefits to all of us.

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