ICO & Venture Capital innovation – CirclePay and the Friendz

Bocconi Students for Innovation and BS Fintech had the opportunity of being joined by three great guests to discuss the hot topics of cryptocurrencies and Initial Coin Offerings (ICOs). The real-life experiences shared by Elena Lavezzi (Circle Italia), Alessandro Cadoni (Friendz), and Federica Cunego (VC VareseNext) lead to a stimulating debate on the future of venture capital with the advent of Blockchain, the risks and uncertainties that this technology still implies and what needs to be improved to make it an even better financial tool.

Circle: The New Shape of Money

Elena Lavezzi, General Manager for Circle Italia first introduced the fintech company, founded by Jeremy Allaire and Sean Neville, which is to date one of the most well-funded blockchain start-ups with a value close to 3 billion dollars. Circle has recently launched the new app CirclePay, which implements a new cryptocurrency pegged to the dollar and runs on the peer-to-peer network leveraging the blockchain technology Ethereum. Once US dollars have been transferred to Circle’s USD coins, they can be moved within seconds, allowing you to exchange money with anyone in just seconds, overcoming the inefficiencies of traditional intermediaries which can often take hours if not days.

Moreover, thanks to its recent acquisition of the cryptocurrency platform Poloniex, with a monthly trade volume of 2B$ in cryptocurrencies, Circle has grown to become one of the leading OTC bitcoin traders in the world.

Friendz: A Rock n’ Roll Company

Friendz was launched in 2016 and in 2017 it had already generated €1,2 million in revenues, with a community of over 200,000 users. It is a platform that allows companies to self-promote by engaging their consumers in the advertising of contents through fun campaigns on social media. The users can choose to become brand testimonials of their favourite products and are compensated for the photos and selfies they post. However, the true innovation is that the retribution is not monetary, but is done through blockchain-based tokens that can be spent on Amazon or on other online retailers.

In March, Friendz made the news for being one of the first companies to successfully raise almost 28 million dollars during a 21-day ICO to fund its expansion. ICO stands for Initial Coin Offering and it is a fundraising mechanism similar to a traditional Initial Public Offer on the stock exchange, but differs in the fact that companies sell their underlying crypto tokens in exchange for Bitcoin or Ether without granting any voting rights or equity. Thus, ICOs are a very attractive tool for the owners of start-ups and growing enterprises.

Alessandro and his team started considering to fund their scale up in Europe through an ICO because they wanted to avoid losing control of their project and did not want to undertake the strenuous process of dealing with venture capitalists once again. As in an IPO, the preparation of the ICO required several months and ended with the “crypto-quotation” in March 2018. To find the right environment for this financial operation, Friendz moved to Switzerland, which is currently the only country, besides Singapore, that has structured a legal framework to properly run an ICO.

How it works and the legal debate

The first step of an ICO is creating a document that explains in detail how the system works, this is called a white paper. Many then create websites and presentations to promote their idea to lure in new investors. If one decides to invest, he/she will send you money (generally either Bitcoin or Ether) in exchange for your tokens, betting that they will sell the tokens at a higher price in the future, thus earnings through capital gain.

At a glance, ICOs seem too good to be true because they grant capital to entrepreneurs without them having to give anything up. However, they also have several underlying drawbacks; first and foremost, there is a big legal debate concerning unregulated ICOs and the huge unjustified amounts of capital tied to them. The potential solution might be to regulate the operation by defining a third-party control, but this would be in direct contrast with one of the main values of the blockchain technology: decentralization. In the United States, for example, the SEC has shed some light on this grey area by imposing restrictions on the status of tokens as of December 2017.

However, Friendz decided to turn to Switzerland because it has recently passed stringent legislation on the matter. Each ICO must be examined by the FINMA on an individual basis to be checked for eligibility. Furthermore, tokens can be distinguished into three different categories: payment tokens, utility tokens (that provide digital access to an app or service) and security/asset tokens (they have the same economic function as equities, bonds or derivatives). It should be noted that classifications are not mutually exclusive, but can also be hybrids and are all treated as securities under Swiss securities law.

Months of research to understand the mechanisms behind this complex system, led Friendz to choose security tokens as opposed to other ones. In fact, Alessandro emphasized that the type of token one chooses has strong implications, especially in terms of safety. The company’s objective was picking the ones that guaranteed that maximum level of security to both investors and Friendz; this implied a long screening process for all investors, so tedious it led many of them to drop out before taking part in the offer.

The lack of safety and transparency in unregulated ICOs has rendered many individuals in the financial world to become very sceptical towards them. Amongst them is Elena Lavezzi, who explained that Circle will not take part in this aspect of crypto currencies as the company strives for complete safety and transparency in their financial transactions and without worldwide regulation, ICOs are too big of a risk for the time being.

Another major drawback of ICOs is that the cryptocurrencies being used still have a low level of purchasing power and are mainly used as investment assets; therefore, the extreme volatility of the currency can severely impact the company, in both positive and negative ways. Alessandro recalls very stressful weeks after the closing of the ICO due to a significant drop in value: the unpredictability it implies might be too much for some to bare. Furthermore, converting crypto currencies into monetary ones can lead to high transaction costs and fees further fuelling inefficiencies.

However, whether you are sceptical or not, the unprecedented result reached by Friendz and its team is undisputable. It is a strong indication that dedication and hard work can push innovation to outperform itself. Although ICOs still have a long way to go, both in terms of regulation and safety, Friendz and other pioneering start-ups have given a completely new meaning to venture capital. As crypto-currencies quickly take over the financial world, start-uppers like Circle will provide us with tools to actively take part into a new generation of value, who knows where innovation will lead us next.

Enrica De Colle

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