What role does Bitcoin play in the future of crowdfunding and equity creation?
“Think about gambling without a casino. Think about stock trading without an exchange. Think about real-estate transactions without deeds. Think about transactions without clearinghouses. That is a world we are heading into.”
Fred Wilson, the Collaborative, Peer and Sharing Economy Summit
A leading venture capitalist, Fred Wilson is the founder of New York firm Union Square Ventures. He believes that, as revolutionary as companies like Uber or Airbnb might seem now, they are only the beginning of a larger movement. In a very short space of time, technology has made it possible for people anywhere in the world to connect with each other and, as technology evolves, people will become even more connected. And so, he argues, in the next decade or so, peer-to-peer economy will —and not might— thrive without the need for a centralized authority.
At this moment, the most widely recognized decentralized system there is is Bitcoin. In recent months, however, some members of the Bitcoin community have claimed that underfunding is leaving the development of the protocol in crisis.
On June this year, self-proclaimed bitcoin millionaire and entrepreneur Olivier Janssens called for a $100,000 bounty for a platform to facilitate funding for critical bitcoin projects. A few weeks later, developer and former Google engineer Mike Hearn, creator of the decentralized crowdfunding platform Lighthouse, was awarded $40,000 of the $100,000 bounty, which will be released once the platform is launched sometime in August.
In the announcement post, Janssens said that Lighthouse would allow the community to propose core initiatives leveraging crowdfunding and verifying support for a particular project. However, although the promoters claim that the platform will stimulate greater transparency and accountability, many suggest this plan will further centralize development.
New Funding Law Pending on Final Approval From SEC
In any case, Bitcoin crowdfunding isn’t a new trend. Other sites like Idea.me have been accepting pledges in Bitcoin since 2012 and dedicated sites such as BitcoinStarter have also been going on for a while.
Pozible, for example, is one of the main platforms in Australia’s burgeoning crowdfunding market. After receiving multiple requests from users asking for Bitcoin support, they started accepting Bitcoin crowdfund payments in October 2013.
The fact that a more broad-definition platform like Pozible accepts Bitcoin is a clear sign of the growing popularity of the online currency, probably sparkled by the low cost associated with the transaction.
Bitcoin crowdfunding involves no banks, therefore implying lower fees. In addition, transactions are simple and mostly free —and when they aren’t, the commissions are usually less than a third of a standard credit card or Paypal commission.
The problem up until now has been that larger platforms have started to reach equity funding, but companies are not legally allowed to give away equity as part of a crowdfunding project.
Since bitcoin isn’t a currency as such —only businesses that exchange the digital coin for fiat currency are regulated as money transmitters— there are some businesses in the bitcoin domain operating equity-based crowdfunding. In general, these call themselves bitcoin stock exchanges. However, the concept of equity crowdfunding/bitcoin IPOs is still shaky.
Indeed, main platforms have found that following guidelines is rather challenging. But this might change soon. “Regulation A+, a little-discussed provision of the JOBS Act, would allow a company to raise up to $50 million selling stock to the general public through a mini-IPO that would not be overly expensive or burdensome from a regulatory perspective”, reported Kendall Almerico in early July 2014.
This attorney specializing in crowdfunding and contributor at the Entrepeneur magazine believes that the law and rules proposed by Securities and Exchange Commission will keep Regulation A+ as a powerful tool for funding small businesses, as “it might not cost a company much more to raise $50 million under Regulation A+ than it would cost to raise $1 million under the equity crowdfunding provisions of the JOBS Act.”
‘Cryptoequity’ Set to Redefine Crowdfunding
At the moment, though, there still is obvious friction in early stage investing, including having to be an accredited investor or owning a legal entity. Complex and evolving regulations have forced many crowdfunding platforms to creatively solve in order to reach equity funding.
Joel Dietz, a Philadelphian now living in Berlin, and his four business partners have responded to this challenge with a widespread approach to cryptoequity and community funding. Just recently they created a new platform called Swarm, a decentralized crowdfunding site based on Bitcoin 2.0 technology that enables startups to issue their own digital, cryptocurrency tokens to distribute to investors in order to raise funds.
Using Bitcoin as an application platform —different from Bitcoin as a digital currency— allows for property rights (such as shares, digital money, etc.) transfers without the involvement of a middleman such as a government, bank, or even a crowdfunding platform.
As Catherine Clifford explains, the fact that the token is digitally programmable makes it possible for startups to give value to their investors in any way they want, may it be in the form of dividends, voting rights for executive decisions, a product or service, or any other creative reward.
By using the Bitcoin protocol, Swarm allows people to invest directly into startups. Users don’t need to have a legal entity and they can fund all sorts of open source software projects —not just cryptocompanies— without the red tape.
The platform’s capability to make use of Bitcoin as a technology and means of funding will surely have monumental repercussions on the future of equity investments. However, this is not something that is going to be mainstream in the next couple of months.
Beyond having to navigate embryonic regulations and make crowdfunding understandable to the general public, their biggest hurdle is to find people interested in pledging bitcoins —indeed, even among the bitcoin community, there are those who understand Swarm but also lots to whom it is still unclear, as Dietz has admitted himself.
In the coming months, therefore, we shall find out whether this initiative envisioned as “a step toward ‘democratizing’ finance —a way of leveling the playing field for inventors and entrepreneurs who may not have access to funding through the hierarchical layers of the current finance model—” can and does indeed disrupt the crowdfunding industry.
Photo: Fabian Figueredo