On my previous blog, someone asked this interesting question; I’ve noted my response below

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This article is in response to a discussion on my earlier blog post on How to ICO.

There is negative news for the following reasons:

1. Anyone can print tokens. Companies are currently printing them without “substantial” representation — thin air!

2. Investors/ token supporters being targeted are not familiar with economics. Do they understand why fiat currency printed by the central banks are backed by reserves? Do they understand that speculation is the outcome of demand and supply economics and that the factors influencing the fundamentals are still production capacity, substitutes/competitors, human labor resources, etc? If not, how can they more or less figure the potential value of the token they are speculating on? At the moment the speculative behaviour is caused by whats called as “herding behaviour “(follow what other people in the market are doing rather than conducting their own due diligence), which causes markets to fluctuate away from real fundamentals.

3. Just because Filecoin, TenX, Bancor, Aragon, and all these successful ICOs have raised up to $200m, everyone wants the same without a reasonable value proposition for the product they are building. In this case, they are not adding real value.

I believe tokens are an innovative approach for real time transfers, reduced/ eliminated middle office fees, and convenience. It has advantages. I’m an avid supporter! Its powerful and valuable. However, fundamentals need to be solid.

Also read: Are ICOs a scam or a blessing upon the startup ecosystem?

If your tokens are backed by the right fundamentals ex. equity or gold reserves, fiat reserves, real estate then I do not see the problem. In this case, the tokens are not created from air. In the case for ICOs tokens are purchased because investors believe in the idea, the potential of the product, the team building product, and market size. If a private company does not have the funds to store reserves and back tokens with more stable assets such as real estate, then it can resort to backing it with shares. This means, the price of its token should move closely with its shares, creating a direct correlation with the company’s performance.

Because of the risks involved in performance, investors normally ask for access to a claim to asset, voting rights, claim to revenue, claim to a service/ product one would otherwise pay more. Shares/Equity is still the most practical and appropriate fundamental. However, regulation becomes a nuisance here.

In terms of regulation, I’m confident with the UK/EU just because companies can adopt certain exemptions for their token activities plus its a jurisdiction everyone in the world trusts. The exemption to the rule are based on CapchainX’ legal opinion from a top law firm (DLA Piper). We share this with our clients so they can adopt the recommendations. This way, if one day tokens get regulated either as a security or as a type of money, you’re confident you wont get shut down, or asked for a fine. You have peace of mind!

Gibraltar and Zug are emerging as interesting crypto locations but (in my opinion) being in the UK/SG has advantages — business network, market, international reputation, strong legal system — which affects business operations of the startup. At the end of the day, any startup that seeks to create tokens has an actual “business” to run. They need to balance out whats good for its business operations and not only the best jurisdiction to raise funds through tokens. I would recommend looking at the jurisdiction that is favourable for business operations and applying exemptions to the law for the tokens (legal opinion from a lawyer necessary).

Let me know if theres anything I can help you with! Happy to look into your ICO.

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Beryl Chavez-Li is cofounder and CEO at Capchainx

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