Mixed blessings of Initial Coin Offerings
Jamari Mohtar 
Bitcoins suffered when ICOs were banned in China but in actual fact bitcoins were never created through an ICO

When China finally made the anticipated move against Initial Coin Offerings (ICOs) in September, followed by some other countries, the doomsayers were up on their feet, predicting gleefully an impending epic crash of cryptocurrencies, especially bitcoins.

One professor of economics sent me a Bloomberg article on JPMorgan Chase’s CEO Jamie Dimon saying bitcoin “is a fraud”, while a friend who was a former professor of economics with characteristic nonchalance messaged me, saying bitcoin is worse than tulip bulbs.

Then came the news that Bank Negara Malaysia (BNM) is mulling whether to ban cryptos like bitcoin by year’s end and all smart-alecs went on overdrive in raving and ranting “I told you so”, until I had to point out that the fact the decision will be made later shows cryptos are currently not banned in Malaysia.

These people were barking up the wrong tree. The culprit is ICO but bitcoin gets the blame when in actual fact the famous crypto was never created through an ICO. And instead of an epic fall, it only fell 46% to US$2,981, days after Dimon’s comments on Sept 13 – a pattern already repeated several times this year, some with a more than 50% fall. But it recovered to its previous high in early October – another repeated pattern – and was trading at about US$5,674 as of Oct 16.


What’s behind the China ban?

What we’ve seen in China is the proliferation of start-up companies or projects issuing digital currency tokens that were supposedly backed by the prospect of future technological innovations, which turned out to be dubious innovations and basically cashing in on the ICO craze. These are nothing more than scams.

The worst part is when the ICOs were used to raise funds by creating digital tokens that are strictly not cryptos because of the absence of block chain distributed ledger and public key cryptography. Here’s a simple rule: Cryptos are digital monies but not all digital monies are cryptos unless they are “embedded” with the block chain and public key cryptography.

Take the case of the US dollar. At last count, there were more than US$13.5 tril in existence. But the US Federal Reserve says only US$1.5 tril exist as actual paper notes, which means nearly 90% of all US dollars in the world exist as “digits on a screen” – digital monies not of the crypto kind.

And the Fed creates most of it out of thin air, which it can’t do with cryptos. You may remember quantitative easing (QE) used by the Fed to jump-start the economy and stimulate it. Most people think of it as a massive money-printing operation, but the Fed didn’t print any money. It just added a few digits to its balance sheet.

Instead of a positive stimulus effect, the QEs had depressed interest rate to almost zero, which caused a debt-spending spree that in turn caused asset price bubbles, thus postponing complete recovery till today.

This low interest rate regime prompted investors to seek a better rate of return and when they saw prices of cryptos going up by leaps and bounds, the crypto craze was born. That was last year.

Hence, when US$400 mil has been raised in China so far on the ICO platform, the People’s Bank of China came out and said: “Look, enough is enough. This is out of control. We’re putting a complete ban on ICOs.”


Lessons from Singapore

Singapore has the uncanny ability to “smell” emerging technologies that will become mainstream when these are still in their infancy and are not on the lips of other governments.

Since independence, the city-state has made the art of futurology a science. Also known as strategic foresight, futurology is the study of postulating possible, probable, preferable or alternative futures, and the worldviews and myths that underlie them.

Tools of strategic thinking like scenario planning and terrain mapping are often used in this field. Also employed is the methodology called emerging issues analysis which searches for the drivers of change, issues that are likely to move from unknown to the known, and from low to high impact.

This has resulted in the city-state having a competitive advantage of being, most often than not, a first mover in applying new technologies.

The country’s pro-business policy is well known but what is seldom known is its love for start-up companies that have the potential to, metaphorically speaking, lay the golden eggs. Thus, they will be treated like a “pampered” child so as to help them focus their mind on their innovative spirit to discover technologies that will be beneficial to mankind.

I first discovered this when writing that Bitcoin “rolled” in Singapore in FocusM in 2014. The focus of the news was on the island-state being the first country in Asia to roll out the bitcoin ATM and its stance on bitcoin being not a legal tender in the country and will remain unregulated. What caught my attention then was that a local start-up was the manufacturer of the bitcoin ATM machine itself. It had created a mania when it first made an appearance in Europe and the US.

My article and a subsequent one showed Singapore had already become a hub for cryptocurrency technologies in 2014. This means it had already positioned itself as a hub way back before 2014 when words like block chain and peer-to-peer network were seldom heard. This also means the process of applying futurology that led to this decision was made much earlier, probably in 2010.


Cool and collected

This explains why its response towards ICOs is cool, collected and sensible. It does not dramatise the rapid rise in the price of bitcoin as worse than tulip bulbs simply because it must have realised that 99.9% of the world population are still ignorant of the existence of cryptocurrencies. So how can the 0.1% cause a financial contagion with the price volatility?

As for ICOs, start-ups need funding for their innovative projects because they do not have the track record to apply for funding under a highly regulated Initial Public Offering (IPO), and the sole avenue open to them in this regard is the costly venture capitalists’ funding.

Singapore appreciates the innovative spirit of ICO, which strictly speaking resembles crowd funding, and hence it adopts a targeted approach to improving ICO with existing, not new, legislation by making any tokens that have the characteristics of securities come under the Securities and Futures Act.

On the exponential rise in value of some cryptos, the republic’s Deputy Prime Minister, Tharman Shanmugaratnam, said “as a financial regulator, MAS’ focus is securitised interests in assets – such as shares in a company. The Monetary Authority of Singapore (MAS) ‘does not and cannot regulate all products that people put their money in thinking that they will appreciate in value’.”

“But recognising the risks of investing in virtual currencies is significant, MAS and the Commercial Affairs Department have published an advisory alerting consumers to these risks, and are working together to raise public awareness of potential scams,” added Tharman to queries on virtual currency in a parliamentary sitting on Oct 3, the day BNM announced it was considering banning cryptos.

Jamari Mohtar is a veteran journalist who used to work in Singapore. Comments:

This article first appeared in Focus Malaysia Issue 255.