The Malta Independent 24 June 2019, Monday

Deciphering the hype behind ICO and IPO trading patterns

George M Mangion Tuesday, 20 November 2018, 08:58 Last update: about 8 months ago

As the birth of the crypto world dawned, PKF sharpened its tools and started a global voyage to christen the new sector and share the advantages of its success with other countries. Therefore, following an intensive roadmap, PKF executives toured the crypto capitals of Zurich and Canton of Zug, Hong Kong and Shenzen, Cannes, and later on this month Silicon Valley USA.

Our trawling expedition has borne fruit and we can guide a small but growing portfolio of entities active in the DLT space which currently ranges from providers offering consultancy to IT & software architecture offerings, ICOs and crypto currency exchanges/hybrid platforms. The young industry is shrouded in mysterious jargon. Readers, ask what is the difference between an IPO (Initial Public Offering) and ICO (Initial Coin Offer). An initial public offering is a type of public offering in which shares of a company are sold to institutional investors and others in the open market. An initial coin offer is defined by Wikipedia as a type of funding using cryptocurrencies sold as 'tokens' or 'coins' to investors in exchange for legal tender or sometimes for other cryptocurrencies such as Bitcoin or Ethereum.


The tokens thus generated are promoted as future functional units of currency if or when the ICO's funding goal is met and the project described in the White Paper is launched. The curiosity behind the meaning of the two acronyms is heightened when one continuously meets with references to a successful IPO being launched on the international markets. Actually, it is bonanza time for IPOs, especially in the US where tech companies are the flavour of the month. One major benefit of using the ICO system is that it allows companies to avoid some of the more complicated regulatory steps required when offering an IPO. Recall that back in the late nineties during the Clinton presidency, IPOs were so popular, and paradoxically, that was the time when the dot-com bubble was about to burst.

Back to the present, we notice how start-ups in the US have been nurtured by private investors and venture capitalists clamouring to experiment and research on disruptive technologies. Only one out of 10 start-ups will prosper and become a proverbial Unicorn with wide roads leading to profitability. But, as stated earlier most emerging start-ups owe their success to having launched a successful IPO. Having investors such as SoftBank Group Corp., with a kitty of $100 billion poised to raise more cash via private share sales and participating in smart IPO, this scenario sets the record for a bull market. One can definitively remark that 2018 is a growth year considering that a number of US tech and communications companies are up 18 per cent on a weighted average basis. The popularity and effectiveness of IPOs are manifest in the success garnered by less well-known sectors such as research in cancer treatment. One example is Guardant Health Inc., a start-up that raised about $550 million in venture funding in less than six years. There exist other examples of biotech companies which had no trouble raising capital in an IPO.

Reverting to ICO, one remembers the euphoria that gripped the masses last year when Bitcoin value shot through the ceiling almost touching $20,000. This time, the ride is bumpier as Bitcoin just suffered another crash losing almost 11 per cent in value.

Sadly, the recent turbulence in the crypto market has resulted in a devastating loss of more than $26 billion where Bitcoin (BTC), which previously demonstrated a record high level of stability, this year dropped more than 11 per cent. The unforeseen decline in the price of BTC led other major cryptocurrencies forced small market cap digital assets to initiate steep downward movements. It was expected that this year all cryptocurrency exchanges experience mixed trading activity in a period of low volatility. In fact, one notices how throughout the first two quarters of 2018, tokens and small digital assets recorded 40 to 80 per cent losses against BTC, which itself, declined by around 70 per cent on its own. One hopes that the sustainability of this nascent sector, the negative sentiment does not continue next year.

This is not a desired prognosis for Malta, which has been actively promoting itself as the ICO "Queen of the Med". The government sponsored mega conferences this year to help galvanise world attention that Malta means business and is friendly to the crypto investor techies who roam the world searching for a safe haven. To harness this sector, Malta was quick to promulgate three new laws in July. These came into force on 1st November and the regulator Malta Financial Services Authority has just started accepting applications from service providers who wish to be licensed as Virtual Financial Asset Agents; the latter, once certified, will in turn service the industry. Under each of the three new laws, a number of rulebooks and regulations have been issued, including guidelines on taxation treatment as well as the pertaining rules applicable to virtual financial asset agents and Issuers. Much publicity has been given to acquaint the international business community that the new Maltese legal framework caters for the regulation and licensing of DLT assets and a variety of services connected therewith that are properly classified as Virtual Financial Assets.

Such virtual financial assets are not virtual tokens (these are not subject to any regulation), not financial instruments (these are already subject to existent MIFID framework), and not e-money (these are already subject to existent E-money Directive). Having laid solid foundations for this industry, Malta has walked the extra mile to set up another innovative and new piece of legislation that provides an ISO type certification of the DLT technology and innovative technology arrangements. A unique piece of legislation is the financial instrument test. The latter scares the wits out of the uninitiated since it is a densely structured checklist drafted by the regulator, and mirroring for the most part the existing MIFID directives. Its base aim is to determine whether the DLT asset in question is a virtual financial asset as properly defined by the new legislation. As can be expected, the regulator was strongly tempted to gold plate the rules so the test itself is extremely detailed, lengthy, technical and arduous and carries with it an extremely high onus of responsibility and liability on the legal advisors who ultimately sign it.

In conclusion, there is no magic crystal ball to foretell whether an IPO will maintain its present supremacy as a tested vehicle for attracting capital when compared to the ICO in the crypto world. One hopes that the current bear market in crypto currencies will soon lift making it possible to reach the exemplary highs recorded last year.

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Mr Mangion is a senior partner at PKF, an audit and consultancy firm.




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