From the Boston Business Journal:

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1 MENU Account FOR THE EXCLUSIVE USE OF From the Boston Business Journal: COVER STORY Gambling on cryptocurrency: Boston area startups poised to cash in Boston-area startups are poised to cash in on 'initial coin sales' and many tech founders and investors are convinced that cryptocurrencies and the software that underpins them, known as blockchain, could be as big as the internet itself. SUBSCRIBER CONTENT: Nov 9, 2017, 10:30am EST Updated: Nov 9, 2017, 11:00am EST In late October, about 70 people squeezed into a noisy basement barroom in the Financial District to hear three technology startups explain their plans to launch new forms of digital money, known as cryptocurrencies. The event was billed as Boston s First ICO Pitch Night, a reference to the way that such currencies acquire real-world value through what s called an initial coin offering, or ICO. While most people have heard of the best-known form of cryptocurrency Bitcoin ICOs of lesser-known types of cryptocurrency have exploded this year, with more than 150 companies globally raising more than $2 billion as of Sept. 30, according to Coindesk, a news site and data aggregator. Others who track the phenomenon put those figures even higher. We re in the hype part of the cycle, where unfortunately people are fearful they re missing out, and greedily looking at what the potential returns are. Boston venture investor Michael Skok Only a few Boston startups have gone through the process so far and they have raised relatively small amounts of money. But more local entrepreneurs are planning coin sales in the coming months, and many founders and investors in the city s tech community are convinced that cryptocurrencies and the software technology that underpins them, known as blockchain, could eventually have as big an impact as the internet itself. Boston startups are considering how best to create and sell cryptocurrencies responsibly, often with the help of local law firms, and with sign-off from their investors.

2 What s wrong at the moment Despite the attention they ve received or perhaps because of it cryptocurrencies are a gamble. Coin offerings compound the usual risk of investing in early-stage startups by giving entrepreneurs access to eye-popping amounts of potential no-strings-attached cash before serious demand has been proven for their products. And in July, the U.S. Securities and Exchange Commission issued a memo indicating that some coins fall under the definition of a security, and are therefore subject to strict regulation. In the Wild West of coin offerings, even well-intentioned founders might eventually find themselves running afoul of the SEC, or else their own investors. We re in the hype part of the cycle, where unfortunately people are fearful they re missing out, and greedily looking at what the potential returns are, said Boston venture investor Michael Skok, a strong proponent of blockchain technology who is nevertheless dubious of the current rush to cash in on it. What we should have is the curiosity to understand first, before throwing money at things. And that s what s wrong at the moment. Built on blockchain Blockchain software the basis of cryptocurrency stores data simultaneously on many computers, creating a secure, immutable record of digital transactions. The system enables individuals to send one another money online without the intervention of banks or governments. Some cryptocurrencies, such as Bitcoin, can be used like real money. But the cryptocurrencies that most startups issue can be used only for transactions that happen on their own platforms, like how Monopoly money only works within that game. While the controversial ICO process is named after an initial public offering, it s different in that investors don t get equity in the company itself. In most cases, the sale of the digital coins, will help fund the company s operations, and the coins will then be the way users pay for transactions on its platform like if Hasbro made Monopoly boards for free, but sold the make-believe bills necessary to play the game. FirstBlood, an e-sports company that lets gamers win prize money, was the first Boston startup to issue its own cryptocurrency, raising $5.5 million in September 2016 during an ICO that sold out in less than a minute, according to founder and CEO Joe Zhou. INITIAL COIN OFFERINGS IN Jan 17 Feb 17 Mar 17 Apr 17 May 17 Jun 17 Jul 17 Aug 17 Sep Sum of ICO fund raised by month ($M) Source: Coindesk

3 FirstBlood s ICO was intended to raise enough money to build the first public version of its product. But that practice is now seen as risky in light of the SEC s memo, according to founders who are considering ICOs now, because it makes the coins seem more like securities. Zhou said he might structure an ICO differently if he did it today. But as one of the first ICOs anywhere, he said FirstBlood was pretty compliant based on the knowledge we knew then. Now that FirstBlood has built and released a public version of its platform, its coins can actually be used to play games online, strengthening a key argument that the coins have a utility and are not simply financial securities. Similarly, the most recent Boston company to have an ICO, Airfox, tried to fall in line with what it imagines future SEC regulations might demand by releasing its product a mobile web browser that allows users in developing countries to earn micropayments by viewing online ads before it sold the coins that make the platform work. Airfox also verified the identity of each person buying coins and only accepted money from accredited investors. That process forced the company to delay distribution of the $15 million worth of coins it sold, making some investors angry, but CEO Victor Santos said the precaution was needed. Within four months, the landscape has changed entirely thanks largely to the SEC s July memo, Santos said. Had we done our ICO in June, maybe we didn t have to go through this. Worth the risks There are many reasons entrepreneurs and investors are attracted to cryptocurrencies despite the risks. For founders, ICOs are a way to raise significant funding without giving up a share of their companies. Early venture backers might accept one of their startup investments raising an ICO for the same reason. As for the purchasers of cryptocurrency coins, some are probably speculators hoping to get in early on a new asset class that could eventually be worth a fortune. Others like the idea of investing in startups without having their money tied up for years like in traditional venture investment. Secondary trading markets make cryptocurrencies just as liquid as public company stock. But a deeper motivation is that the process can create a large community of people who now have a vested interest in seeing the startup succeed. In the Monopoly metaphor: If you ve purchased a bunch of pink $5 bills, you really want Hasbro to keep making Monopoly boards on which you can play with them. Furthermore, if it turns out that everyone loves playing Monopoly, and you own some of the limited supply of Monopoly bills, those bills are going to soon be worth more than you paid for them. That appears to be the situation in which Boston startup LBRY finds itself more than a year after it released its own cryptocurrency without raising funds by selling the tokens. The market cap of the company s currency is now about $15 million, but more important for founder and CEO Jeremy Kauffman is the fact that about 10,000 users actually use LBRY Credits to participate in its decentralized content sharing network. Your users are stakeholders in a way they weren t previously, Kauffman said. I want you to buy LBRY credits if you care about the ideas that we stand for. Rob May, a repeat entrepreneur who spearheaded last month s ICO Pitch Night, has a similar outlook. May is now the founder and CEO of Talla, which makes artificially intelligent chatbots that can handle basic requests for IT and human resources teams. In September, he unveiled a blockchain-based system that would allow chatbots like his to record every detail of their interactions, making them easy to audit and therefore more appealing to businesses. Now, Talla is planning to sell digital coins to support this blockchain system, which May calls Botchain. The ICO is tentatively scheduled for next month, though May hasn t said how much he plans to raise. The idea is a good example of blockchain s core value enabling safe, digital dealings between entities that don t trust or even know each other. May is typical of many entrepreneurs in the space, who acknowledge the risk they are taking but feel the promise of blockchain makes adoption of the technology nearly inevitable even though a few high-profile hacks of cryptocurrencies have raised security concerns and the ICO bonanza has made many people skeptical of the whole technology.

4 All the criticisms people are making of blockchain they re all true, May said during his pitch-night presentation when asked why he would risk his business by getting involved in blockchain and cryptocurrency. They re all irrelevant in the long run, he argued. LOCAL CRYPTOCURRENCY COMPANIES Airfox Allows mobile phone users to view ads in exchange for micropayments. Raised $15 million in an ICO in October Caviar An investment firm focused on cryptocurrencies and real estate. Plans an ICO for late November FirstBlood E-sports startup. Raised $5.5 million in Boston s first ICO in September LBRY Makes a decentralized content sharing platform. Didn t initially raise money from the released of its coin, but sold some of its own stockpile once the currency became valuable. Nebulous Runs decentralized data storage platform Sia, and has released two associated coins. The first release didn t raise any money for the company, but the second did. Talla Makes artificially intelligent chatbots for businesses. Targeting an ICO for early December Kelly J. O'Brien Technology Reporter Boston Business Journal

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