INITIAL COIN OFFERINGS SOAR
Billions raised as regulators warn of scams
Tech startups, including some in Boston, have raised billions of dollars over the past year by selling their own digital currency, but experts and regulators are warning that the suddenly exploding market is rife with scammers looking to make a quick buck off the cryptocurrency craze.
So-called initial coin offerings have surged in popularity, with many companies using existing digital currency technology to create their own version of bitcoin. These “coins” are meant to be used as the main way to pay for the company’s product or services on the company’s platform.
Just last year, companies raised nearly $3.5 billion from individual investors through November by selling digital currency, according to cryptocurrency site CoinDesk.
The tokens are based on technology called blockchain — a foundation of bitcoin and nearly every other cryptocurrency — that lets developers create a public ledger of transactions that is controlled by every user rather than a single entity.
But many regulators, including Massachusetts Secretary of State William F. Galvin, are looking into ICOs in their state.
“If you’re going to offer this, you have to comply with the rules,” Galvin said. “We can’t have entities out there soliciting money to invest in future cryptocurrencies without figuring out who those entities are, if there’s a legitimate product at the end of the day.”
Galvin said his office has started looking into a number of Bay State ICOs but declined to comment further, citing the ongoing investigations.
One Boston-based company taking advantage of the cryptocurrency market is Sia, which is using blockchain technology to develop a peer-to-peer digital storage system. The blockchain allows Sia to keep a record of what users have contributed storage space and in order to compensate users and contributors, the company created Siacoin — a digital currency that can only be used to pay for storage.
“When you buy Siacoin, what you’re really buying is space on the network,” said Drew Volpe, a venture capitalist at First Star Ventures and Sia board member. “There are a number of really interesting technologies and projects we can build on top of blockchain.”
Siacoin is now worth a collective $2 billion. Still, it’s likely that at least some of those who buy and hold Siacoin have no interest in Sia’s actual software. Like bitcoin, investors and speculators have moved into nearly every digital currency, in part because of the massive returns seen by early bitcoin investors.
“A lot of what you’re seeing is a lot of speculation, a lot of hype, a lot of fear of missing out,” said Christian Catalini, a professor at the MIT Sloan School of Business who studies digital currency. “What you’re seeing right now is opportunistic entry. Some of these are frauds and scams. This is probably no different than the dot-com bubble.”
Volpe said ICOs allow individual investors to invest in tech companies, which are waiting longer and longer to go public.
“The private markets are so inaccessible, if you look at companies today, they stay private for a really long time,” Volpe said. “Most of the appreciation, most of the value creation isn’t something a normal retail investor can invest in. That’s created a lot of capital that wants to invest.”
Creating a new digital currency is extraordinarily easy, and requires only a few lines of code on top of existing technology. The low barrier has led to coins like Dentacoin — a virtual currency for dental work — that currently has a market cap of $1.1 billion.
Attention from state and federal regulators has already prompted some companies to be more cautious. Talla Inc., a Boston startup that rewards users for auditing and authenticating chatbots, modified a planned ICO and will only target accredited investors. It now plans to raise between $15 million and $20 million selling tokens that can be used on its platform.
“People have become so wary of the SEC that it’s become the reverse, you only sell to accredited investors,” Talla’s chief executive,
Rob May, said. “We were going to sell a lot more in a public ICO.”