ICO’s For The Institutional Market

IT departments at major corporations are all looking at how to apply the latest innovations to their products and processes.  These include artificial intelligence, chatbots, big data and, most recently, blockchain.  As companies redirect their innovation programs to focus on these efforts each one must be evaluated for how much to invest and its long-term merits.  

There is no question that the corporate worlds understanding of blockchain technology is on the rise right now.  In June, nearly every blockchain related term hit an all-time global google search interest high.

Surely much of this has been driven by the sudden success of Initial Coin Offerings and the rapid rise in value of Bitcoin, but there has also been an associated drive to solve real problems in the business world with Blockchain applications.

Hu Liang has a thoughtful article on Coindesk: https://www.coindesk.com/four-quadrants-dividing-conquering-crypto-universe/ which breaks down the progress of Blockchain development along two dual axes of Institution vs. Consumer applications and Blockchain vs. Crypto-Assets.  This is well worth the read and, while his view on the new institutional asset class is interesting, it doesn't really touch on how the ICO investment model is changing the tech sector.  

Since June we have seen an explosion of ICO's and with them, the creation of several new tokens that are being exchanged on the market enabling the creation of new distributed applications built on blockchain technology.  The majority of the projects have focused on new cryptocurrencies or improved platforms for Distributed App development, however we have also seen a proliferation of consumer oriented decentralized applications such as prediction markets, gaming, cloud file storage and asset management.

All of these focus on the consumer market while on the institutional side, most projects are taking place at either Financial Services or Technology firms and are currently being funded out of R&D.  Many of these are leveraging the Hyperledger framework or other private blockchains and are not interacting at all with the market of tokens and currencies that is proliferating.  The one exception to this may be Ripple which has brought together a collaboration of Fortune 500 institutions and regulators to try and displace Swifts hold on interbank payments.

The next frontier in the evolution of blockchain may be to apply the token economy model that has taken off this summer to solving problems for businesses.  Once this happens it can help provide the funding for innovation in the fintech industry that typically moves much slower and will help smaller companies scale up to the required infrastructure to meet the needs of top tier multinational institutions.  While legal departments will have to start to evaluate whether they want to sink any assets into token releases, the first movers have an opportunity to solve big problems with early investments that can bring them solutions much cheaper than if they wait.

Imagine a world in the future where a CIO approaches a technical problem not simply through a Buy vs. Build framework but a third option emerges that allows a company to purchase tokens that help fund a project that will solve their problem.  The market of tokens could create more open competition among solution providers while still providing liquidity to develop new solutions.  As early adopter’s businesses could afford the risk of funding two projects creating competition and still solving their problem more economically than their previous options. 

To open this door, a tighter regulatory framework needs to be defined and enforced.  Today there are too many shadowy figures in the token sale space and the potential for a regulatory crackdown is high.  Hopefully, an increased regulatory framework allows organizations to feel more comfortable to participate in this innovative model for facilitating new economies.