June 20, 2018
How to finance an enterprise using cryptocurrency

Some enterprises now no longer sell shares on the stock market to raise capital, but what are known as “tokens”, a kind of cryptocurrency credit, instead. As yet unconventional, this financing method for start-ups seems to be highly promising; ultimately there are already staggering examples of ICO financing.


35 million dollars in 30 seconds

Brave Software is supposed to have earned 35 million dollars in just 30 seconds with the sale of tokens. This financed the Brave web browser. Switzerland is very active in the ICO area. Four of the six biggest ICOs took place in Switzerland, including the record financing of American business Tezos: within two weeks the company mopped up 230 million dollars via the Swiss foundation set up specifically for this purpose.

Yet there is greater scope for fraudsters in the unregulated ICO field. What are the risks for start-ups on the one hand and investors on the other? And how is it, in fact, possible to finance a company by means of an ICO? Andreas Dietrich provides some information in his interview. The lecturer at the Institute for Financial Services Zug (IFZ), of which he is joint head, and at Lucerne University, specialises in retail and digital banking.


Is an ICO a good way to finance an enterprise in Switzerland?

Basically, yes, but at the moment it is primarily suitable for start-ups operating in the field of blockchain technology and that require help with financing. I see it less as financing for other enterprises. The baker around the corner will not raise capital through an ICO in the medium term.


Are there Swiss companies that have already raised financing in this way?

Yes, there are a few, such as LykkeMelonport and Modum. Many foreign companies, on the other hand, have already raised financing in Switzerland via an ICO. So far, some 600 million dollars have been raised through ICOs in Switzerland. In particular, law practices that have focussed on this area are benefiting from this.


What is an ICO?

The term ICO (initial coin offering) is related to IPO (initial public offering), the expression used for a company stock market flotation. The difference is that with a sale of shares you buy shares direct in a company, but with an ICO you buy what are known as “tokens”, a newly established digital cryptocurrency. Unlike a stock market flotation, which is strictly regulated by the government, there is not (as yet) any regulation or government supervision of ICOs.


What risks do such ICOs entail for investors?

The biggest risks are in terms of security. Cryptocurrencies can be stolen. In addition, investors should bear in mind that tokens are frequently illiquid and can be highly volatile. Tokens are therefore a high-risk investment.


What are the risks for companies that want to raise finance in this way?

The predominant risks here are legal. It is unclear what happens if an investment is subsequently prohibited, or a transaction is not performed legally. Above all certain risks in relation to money laundering appear to lurk here.


So should one steer clear of ICOs?

Economically and politically, I find it gratifying that here in Switzerland we are very active in the field of ICOs, indeed in the whole field of blockchain and cryptocurrencies. It makes sense for a forward-looking financial centre strategy. On the other hand, market regulation here should be ensured and the rules of the game made clear. The challenge should be developing regulation that prevents transactions on the grey market but which, at the same time, do not inhibit the market. First and foremost, regulation should sort the wheat from the chaff.


What is the procedure for a start-up if it wants to hold an ICO?

First it is necessary to clarify the legal framework; as this type of financing is still a grey area, it is particularly important that the legal structure is correct, in other words that the individual steps are planned within the statutory regulations. Then there is the technical aspect. It is necessary to define what are known as the “smart contracts” and the tokens. This means how, and in what circumstances, can the consideration purchased with the tokens be redeemed? The next step is marketing. It is a question of finding investors and making as many people as possible around the world aware of the project and getting them to spend their money on it.


Are new ICO projects based on existing blockchains or does everyone make their own?

Both are possible. Many ICOs are based on existing ecosystems, such as Ethereum. In this case a new use case, with which one offers a specific service, is defined. New cryptocurrencies, which can get off the ground, are also created specifically for this.


Andreas Dietrich
Our interviewee holds a degree in Economics and obtained his PhD in banking and corporate finance at University of St. Gallen. He has been a lecturer at and head of the Institute for Financial Services, IFZ Zug and head of the Competence Centre Financial Service at Lucerne University since 2008. Prof. Andreas Dietrich also publishes the Crowdfunding Monitor Switzerland.


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