Travis Scher is a bitcoin and blockchain investor at Digital Currency Group, and a former attorney working on M&A and corporate finance transactions. 

In this opinion piece, Scher gives his personal view of the lately popular ICOs and appcoins, and offers a warning for potential investors. 

Initial coin offerings (ICOs) and appcoins are a hot topic in the blockchain community these days.

Forward-thinking investors have thrown their support behind the movement, thought leaders have proclaimed that ICOs are turning the traditional venture capital model on its head, and bitcoin industry veterans have launched hedge funds to invest in blockchain tokens.

I expect this discussion and activity to gain momentum in 2017, but I remain skeptical.

As the most active investor in blockchain startups, we at Digital Currency Group are uniquely positioned to capitalize on the growth of ICOs. So, over the course of 2016, I’ve taken a close look at what is actually happening in the market.

I’ve had conversations with dozens of entrepreneurs who have either considered or actually raised money via token sale, and I’ve spoken with many of the leading investors in these projects.

And, while I’m excited about blockchain’s long-term potential to enable new models for both financing and operating organizations, I believe that ICOs and appcoins are, broadly speaking, not an attractive investment nor are they likely to become one in the near-term.


For the uninitiated, an ICO is a crowdsale of cryptographically secured blockchain tokens to fund the development and operation of one of three types of blockchain projects:

  1. A platform-layer blockchain (such as ethereum or Lisk)
  2. An organization that operates on a blockchain (known as a decentralized autonomous organization (‘DAO’), or a centrally organized distributed entity (‘CODE’)
  3. A decentralized application (‘dapp’) that runs on a platform-layer blockchain.

A token that fuels a dapp is sometimes referred to as an appcoin, while tokens that fuel DAOs and platform-layer blockchains are simply known as tokens or cryptocurrency.

In a typical ICO, new tokens are issued in a crowdsale in exchange for bitcoin or ether, and then, if sufficient demand exists, digital currency exchanges will make a market so they can be traded.

This new fundraising approach, while still in its infancy, is being hailed as a way to decentralize and disintermediate venture capital, creating new sources of funding for entrepreneurs and new investment opportunities for individuals.

Some blockchain entrepreneurs have been able to raise larger sums of money (with much less effort) via an ICO than would have been available to them in the venture capital market. Moreover, the broad distribution of a token can incentivize early investors to become advocates for, users of, or developers on a blockchain platform. Not surprisingly, more companies we are speaking with are considering a token sale to fund their businesses.

These are exciting developments, and ICOs and decentralized organizations may very well transform industries long-term.

However, in the midst of all this excitement, I believe it is important to be clear about what reality looks like today. And in my diligence, I’ve repeatedly encountered four issues that make investing in new tokens – at least for now – very unappealing compared to traditional VC investing:

  1. Regulatory uncertainty
  2. High valuations/over-capitalization
  3. Lack of controls
  4. Lack of business use cases.

I’ll touch on each in order.

Regulatory naivety

Firstly, the creators of these new tokens seem to broadly underestimate the regulatory risks associated with ICOs.

They often pay lip service to regulatory compliance, and unanimously proclaim that they are “speaking with lawyers” and will “make sure” their offering is compliant. But the reality is that most don’t seem to be taking the legal risks seriously.

Few of the entrepreneurs launching ICOs actually understand the Howey Test, which is used to determine if a transaction is a “security” subject to the SEC’s registration requirements. As an example, many falsely believe that incorporating outside of the US will place them outside of the scope of US law enforcement. And few have convincing answers as to why a new token, rather than bitcoin or ether, is necessary for their project to operate (and thus why their token is not merely crypto-equity).

The folks I’ve spoken with have been broadly dismissive of and naive about these risks. But unregistered ICOs may very well be deemed broadly illegal. I appreciate the ethos of asking for forgiveness rather than permission, but that does not mean investors should stick their heads in the sand.

While the limits of unregistered ICOs have not yet been defined, financial regulators tend to expand their jurisdiction where they can, and the scammy and opaque nature of some of the projects is likely to draw their attention. Having recently released the rules governing…

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