US regulatory agencies are weighing in on ICOs. FinCEN says money transmitter rules apply, CFTC determined that cryptoassets are commodities, and the SEC has stated they are securities. As legal and compliance folks weigh in, let me suggest another view: ICOs are public good charity fundraisers.
According to Google the definition of a public good is: “a commodity or service that is provided without profit to all members of a society, either by the government or a private individual or organization.” (bold is mine)
Public goods sound awesome, right? Unfortunately, the biggest challenge with an awesome public good is that they have a hard time getting funded & built. That’s because the completed good would provide tons of value for society, but the folks who would do the building — and their investors — can’t claim much value for their efforts (cf. without profit above). These goods succumb to the tragedy of the commons: namely that no one wants to do free work for the community. As such, they end up being funded by:
- Governments: cf. public infrastructure like highways.
- Charities: cf. feeding the needy.
- Companies that don’t realize they are building a public good and left holding the bag when it dawns on them & their investors: cf. open source projects
The problem with (1) and (2) is that, despite best efforts, neither governments nor charities are designed to build goods, so their efforts are highly inefficient & wasteful of resources. The problem with (3) is that entrepreneurs & investors are starting to get wise: hence receding efforts & investments in “eventual public good” open source projects (see graph below)
But we still need public goods built. What if, instead of companies doing charity work, the future users of the good paid in advance for it? Think Kickstarter for tech “highways”: a crowdfunded public good charity. What would that look like:
- Prospective users would pre-pay for a project based on a description (maybe a whitepaper? 😉).
- Receive a “token” that they can redeem for an early donor access to the good. If the good is a public commodity, as would be the case here, it’s largely known this early donor access wouldn’t be a significant discount to the market price. Essentially the long-term value of the token should be equal to the marginal value of the public commodity
- Payment from user/donors is used to fund the project
- When (if?) the good launches, users can redeem their tokens for access, thereby bootstrapping the usefulness for society of the good
That sounds like a successfully executed ICO!
The main difference is that today buyers of ICO tokens are likely doing so to speculate on the increasing value of their tokens. That said, if you believe the above, then the ultimate value of said tokens should be low even if the value of the good to society is very high (cf. John Pfeffer’s paper on the topic). It’s the tech equivalent of buying shares of a (free) highway construction project because you think it will revitalize your city.
Don’t be surprised when you’re left holding the bag. Instead, understand that ICOs are public good charity fundraisers and buy tokens only for the goods you’d like to see exist in the world, with no profit motive.
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