SINGAPORE (Dec 31): In May, the Monetary Authority of Singapore issued a warning against an unnamed company to stop the offering of digital tokens, or its initial coin offering, to investors here. ICOs raise funds in bitcoin or other cryptocurrencies. In a statement, MAS said it had determined that the issuer’s tokens represented equity ownership in a company and were therefore considered securities under the Securities and Futures Act. The offer was being made without a MAS-registered prospectus and therefore contravened the SFA. The regulator said the issuer had returned all the funds received from investors here.

MAS also warned eight digital token exchanges based here not to facilitate trading in digital tokens that were considered securities, or futures contracts, without approval from the authorities. While the regulator acknowledged that it did not “see a need to restrict” ICOs and crypto exchanges if they were bona fide businesses, it added: “The public should be aware that there is no regulatory safeguard if they choose to trade on unregulated digital token exchanges or invest in digital tokens that fall outside of the remit of MAS’s rules.”

By the time of MAS’s statement, more than US$20 billion ($27.4 billion) had been raised in ICOs worldwide, since 2014. The bulk of that, or US$14.3 billion, was raised in 2018 alone, according to data from Coindesk. About 8% of that was in Singapore, including by Viola.AI, Lunch Actually and PolicyPal, a digital insurance broker. And, listed companies such as Sakae Holdings were also mulling ICOs as an alternative to raising funds in the equity market.

To be sure, cryptocurrencies have seen a spectacular run over the last couple of years. At its peak in December 2017, one bitcoin was worth U$20,000, rising 2,122% in the course of 12 months. Buoyed by the crypto gold rush, various entities have issued ICOs to raise funds, and have found scores of willing investors to participate in those exercises.

Fraud, devaluation

However, the value of the cryptocurrencies underlying those issues has since fallen a long way. One bitcoin is now worth US$3,000. And, as The Edge Singapore wrote in July, the ICO sector is rife with fraud and hundreds of millions of dollars have been lost or stolen. Notably, the founder of bike-sharing company oBike, which went bust in June, had organised an ICO under Odyssey Network Protocol in January. Some $50 million in oCoins was raised to develop a network that would allow users to rent bikes, using oCoins. But after the funds were raised, there has not been any progress or updates on the development of that project.

Catalist-listed Y Ventures also carried out an ICO in July, to raise US$50 million using its AORA coin, a utility token built on the Ethereum network. This ICO was issued through a joint-venture vehicle, Luminore 8, between Y Ventures and Arke Blockchain Engineering. The AORA platform is an e-commerce concierge platform with a blockchain back end that aims to provide a seamless cross-border buying experience with end-to-end delivery worldwide. However, since the announcement, there has been no new update as to whether the tokens have been listed on a cryptocurrency exchange, or if funding targets have been met.

Indeed, according to a study by professional services firm EY, ICOs have tended to perform poorly after listing. Of the leading ICOs that represented 87% of funding in 2017, 86% of them are below their initial listing prices, and a portfolio of these ICOs is down 66% from the peak of the market.

The study also showed that in 2018, only 13% of ICO projects had a working product, while 16% had only a prototype. While those figures are an improvement from 2017, they still represent a small portion of projects. That means the majority of ICO projects are just ideas. In 2018, only 29%, or 25 projects, had moved from an idea to a working product or prototype among those being tracked.

Furthermore, those ICO projects with a working product have also devalued their tokens by accepting fiat currency in addition to their ICO tokens. And, in one case, an ICO company, decentralised encrypted cloud storage service Digipulse, abandoned its ICO investors by not accepting tokens for paying storage providers.

Unsurprisingly, the pace of ICOs has slowed. Apart from MAS’s warning, the US and China are two jurisdictions that have clamped down on ICOs. As there is more scrutiny of the sector, the enforcement of securities law is likely to follow. “I think the era of [easily] raising money with a white paper is over,” says Paul Brody, EY global innovation leader, who oversees the blockchain group.

Blockchain potential

The troubles in the cryptocurrency sector remind Brody of the dotcom bubble and bust in the early 2000s. There are similarities in how companies then and now approach technology, he says. “First of all, they tried to rush the development market. Some things you can’t rush; blockchain is a good example. They are typically enterprise solutions, and companies take time to adopt [them] because, unlike consumers, they are quite cautious.”

Moreover, while the technology may have been highly sophisticated, it may not be mature enough to handle all the use cases and expectations. “One of the big gaps since day one is that most public blockchains don’t support private transactions, and if you are an enterprise, you want to see that happen,” Brody says. “That technology is maturing now, but if you spent your money in the last 18 months, your business might not live long enough to see that solution develop into a viable capability.”

He adds: “These companies tried to embrace all the potential capabilities of blockchain instead of picking something narrow and specific. A lot of people choose breadth over depth, but depth is very important if you want to have traction over time and survive as a start-up, to solve some really specific problems really well.”

The crypto issues, however, may very well have been what was needed for the market to better appreciate the underlying blockchain technology, and for it to fulfil its utility and potential beyond cryptocurrencies and ICOs. “The hype around ICOs and cryptocurrency has taken attention away from the underlying technology that is blockchain. Blockchains are, first and foremost, an enterprise collaboration technology,” says Jimmy Ong, partner and Singapore IT advisory leader at EY.

There are a number of examples that show how the development of blockchain technology continues despite the crypto issues. These include advancements in e-payment technology, regulation technology and trade financing.

On Nov 11, for instance, MAS and the Singapore Exchange successfully developed a delivery-versus-payment capability, a settlement procedure that ensures the delivery of securities only after payment has been made. This is targeted at the settlement of tokenised assets across different blockchain platforms and is expected to simplify post-trade processes and shorten settlement cycles.

“If the financial services industry can do something better, faster or more efficiently with the use of blockchain technology, and it makes sense for either the incumbents to adopt it or for disruptors to gain an edge, it will be utilised and developed,” says Stephanie Magnus, Asia-Pacific head of Baker McKenzie’s Financial Institutions Group.

And, rather than using cryptocurrencies, the future of payments on the blockchain is fiat currency tokens that can be used as part of complex, multi-party business transactions, says Ong.

In the year ahead, EY’s Brody sees blockchain’s fundamental capabilities in supporting business as well as regulatory compliance improving significantly. “Things like [Know Your Customer and anti-money laundering compliance] are still maturing. Most cryptocurrency exchanges don’t support those requirements yet, but they are rapidly moving in that direction.

“Performance and scalability improves. I think most importantly, over the next year, you’ll see the industrialisation of privacy technology on the blockchain, and the use of zero-knowledge proofs to enable secure confidential transactions between parties,” he adds.

Buyer beware

What then is the outlook for ICOs in 2019? Given the regulatory warnings and various lessons of failure, investors should be able to expect stronger issues.

Baker McKenzie’s Magnus sees the recent investment by SGX and Temasek into ICHX Tech’s capital market platform iSTOX as a sign of how regulators are treating cryptocurrency and ICOs as “a good thing”, and expects the industry to evolve further. “We can see a convergence in traditional listings and ICOs that are regulated as security token offerings,” she says, adding that she expects to see more security token offerings in time to come.

And, there have been major issues backed by strong names. Vertex Ventures, Temasek Holdings’ venture capital arm, has invested in Binance, one of the world’s biggest cryptocurrency exchanges. The exchange is said to be expanding operations into the island republic.

Yet, buyers must still beware. For one, given the nature of cryptocurrency and its relative novelty, investors typically have little information to go on, say researchers at the Warwick Business School.  

“The cryptocurrency market is the perfect environment to exploit asymmetric information,” says Daniele Bianchi, assistant professor at Warwick and one of the authors of the research. “Its opaque nature and the fragmented system — where there are web-based brokers, peer-to-peer exchanges and the regular major exchanges, on which the small exchanges rely for liquidity — mean those who have the information can time the market, make money and drive the prices.”

This story appears in The Edge Singapore (Issue 863, week of Dec 31) which is on sale now. Subscribe here