Kik places a big bet on its own cryptocurrency

WHAT IF WE CREATE A PLACE WHERE CONSUMERS CAN COME, HANG OUT AND PROVIDE VALUE TO EACH OTHER? WHAT IF THAT ALONE WAS HOW WE MAKE MONEY? THAT’S WHAT A CRYPTOCURRENCY ENABLES. — TED LIVINGSTON, KIK’S CHIEF EXECUTIVE

in Waterloo, Ont. Kik Interactive Inc.’s messaging app for BlackBerrys was a runaway hit when it launched in October 2010, though it mostly did what every other messaging app does: send messages.

Since then, though, the Waterloo, Ont.-based company has made a name for itself as an innovator in a commodified industry. It was the first messaging app to announce a bot store, something Facebook Inc. later copied. It experimented with real-world interfaces, allowing users to place orders at local restaurants without speaking to a server. And, in 2014, it started building its own digital economy.

The North American teens who make up the bulk of Kik’s user base can earn “Kik points” in addition to chatting with their friends. Encouraged by a smiling gold chat bot, users perform tasks such as watching ads and playing branded games to earn points they can exchange for digital goods like stickers and smilies.

The points currently have no real-world value since they can only be used inside Kik. But that’s about to change.

Kik recently became the first company outside the cryptocurrency community to announce plans to launch a crypto-token, a digital asset transferred through a shared database, or blockchain, that ensures all transactions are verified and permanent.

If Kik succeeds, it may upend the business model of the biggest online companies and solve one of the most vexing problems of the 21st century Internet: How to make money online without billions of users to entice advertising.

There are hundreds of cryptocurrencies in existence; Bitcoin being the original and best known. But even though the top 10 are collectively worth about US$85 billion, they’re currently little used by mainstream consumers.

Kik users will be able to earn and use a cryptocurrency called Kin within the app just as they did with Kik points, but they’ll also be able to trade it in for cash.

Kik, meanwhile, will gain access to a new source of funding, assuming Kin grows in value along with use and demand. That’s critical because the sheer size of Facebook and Google parent company Alphabet Inc. have made it almost impossible for anyone else to compete for online advertising dollars, with privacy and security concerns mounting as their grip on the Internet tightens.

“Before, you built a big community with all these users and you either sell their attention to advertisers or you try to sell them stuff directly that maybe they don’t want or don’t need or expect for free,” said Ted Livingston, Kik’s chief executive. “What if we create a place where consumers can come, hang out and provide value to each other? What if that alone was how we make money? That’s what a cryptocurrency enables.”

Just as the potential of the Internet was hard for most people to grasp in the 1990s, it can be difficult for today’s layperson to conceptualize how cryptocurrencies work and what they’re for. Peter Van Valkenburgh, director of research at the Washington, D.C.-based cryptocurrency policy and advocacy organization Coin Center, has a useful analogy for understanding Kik’s vision.

He likens the advertising-based business model employed by Facebook to a developer who builds an apartment with the intention of renting out the units, whereas Kik’s token-based vision is more like someone who builds a subdivision intending to sell the houses to individual homeowners.

Van Valkenburgh said he sees huge potential in the latter model: “If this thing develops a lot of use and has a lot of money put into it, it could end up being a technology that unseats Facebook.”

In the apartment building, the landlord is in charge and reaps all the financial benefits. Renters have no incentive to improve the building by planting gardens, renovating their kitchens or keeping the hallways neat and clean.

Likewise, Facebook users who make viral videos or manage popular pages make little money directly from the social network, despite playing a vital role in keeping users interested. And, like the owner of the apartment building, Facebook calls the shots, with users having little recourse besides leaving the social network if they don’t like changes to its privacy policy or newsfeed.

Meanwhile, the subdivision developer sells houses to individuals who then have a financial stake in the success of the community. The developer has to give up control of the subdivision’s future, but the homeowners have an incentive to improve their properties and maintain a welcoming neighbourhood.

Similarly, Kik users and developers will be incented to create interesting content that people will want to pay for with Kin, driving up the token’s value along with demand.

But Kik won’t give up complete control. Unlike Bitcoin, which doesn’t have a central authority with the power to smooth out volatility or order the creation of more currency, a non-profit body called the Kin Foundation, with Kik as its founding member, will oversee Kin.

According to the Kin white paper, the foundation eventually plans to make Kin’s administration decentralized and autonomous, but it will initially oversee the supply and distribution of the cryptocurrency.

Kin will use the blockchain of a software platform called Ethereum, which employs a programming model that allows developers more flexibility than Bitcoin.

Kin, therefore, will be able to harness the technological promise of Bitcoin, but with the company firmly in the driver’s seat.

That means users and investors will have to trust Kik to be a responsible administrator of Kin, but that might be a trade-off they’re happy to make if they can avoid the volatility and unpredictability associated with other cryptocurrencies.

Many popular tokens have had huge rallies during the past year, but stomachchurning drops are common as well.

For instance, in June 2016, the Ethereum network’s token called ether lost half its value over the course of 48 hours after a hacker temporarily made off with the equivalent of US$50 million belonging to investors in a venture-capital project called the DAO.

Of course, being the first company to try something new has other risks. Many observers have suggested token sales such as the one Kik is planning — also known as initial coin offerings (ICOs) — have become wildly overhyped and over-valued, inflating a bubble that will eventually have to burst.

Nevertheless, token sales raised US$110 million in the second quarter of 2017, according to data from the crypto-finance research group Smith + Crown.

By offering a cryptocurrency for sale rather than shares or debt, companies can raise money from the general public without going through the hassle, expense and scrutiny of an initial public offering.

But the Ontario Securities Commission in March issued a release warning blockchain and cryptocurrency companies that their products and services may be subject to securities law requirements.

Pat Chaukos, chief of the OSC fintech support hub Launchpad, said the regulator “supports these innovative ideas and encourages these businesses to speak with us about securities law” in an emailed statement.

The OSC did not directly address whether Kik’s planned token launch would be considered the sale of a security in Canada.

Livingston said he’s keenly aware Kik’s token sale will attract attention from regulators. To protect the company — which has raised US$120 million in funding to date and was last valued at US$1 billion in 2015 following an investment by China’s Tencent Holdings Ltd. — Kik has assembled an international legal team to make sure it stays on the right side of the law.

“We do realize that a company the size of Kik entering the space attracts attention,” he said. “We want to set a standard for how this is done.”

Nick Tomaino, a principal at venture-capital firm Runa Capital who has proposed a set of best practices for issuing crypto-tokens, said Kik seems to be doing things the right way.

Some initial coin offerings are little more than equity sales surrounded by a lot of tech jargon, but he said Kin will be integral to the function of the Kik messaging service, making it less likely regulators will consider it a security.

“A lot of people have used ICOs as just a funding mechanism. Before raising from venture capitalists or launching a product, they’re raising ten, twenty, up to hundreds of millions of dollars to build a product. This is very bad and scary,” Tomaino said. “But I view token sales more as a product enhancement than a funding mechanism. This is what Kik is using it as.”

With the price of Bitcoin at a record high, cryptocurrency investors are currently flush with cash. But both Tomaino and Coin Center’s Van Valkenburgh said Kik would be wise to put a cap on the amount of money it can raise through Kin’s ICO.

“If it’s uncapped, it could get pretty crazy,” Tomaino said.

Livingston said Kik is still working out the finer details of the token sale and hasn’t decided whether or not it will implement a cap on the amount of money investors can contribute.

Investors will, however, only be able to access 10 per cent of the total supply of Kin tokens. Kik wants most of the tokens to end up in the hands of users of the messaging app, not speculators.

Much like baseball cards, comic books and other trinkets collected by children, the parents of today’s teen Kik users may not appreciate the value of the Kin their kids will soon be amassing.

On the other hand, there are also plenty of childhood collectible crazes that later turned out to be worthless.

Three decades from now, a Kin token might be worth as much as a Wayne Gretzky rookie card, or as little as a Beanie Baby. Kik — and the investors eagerly awaiting the token sale — are banking on the former.

If that happens, today’s teens might wish they had saved their early Kin tokens for college instead of blowing them at the smiley store.

IF THIS THING DEVELOPS ... IT COULD END UP BEING A TECHNOLOGY THAT UNSEATS FACEBOOK.