Openomics 2018

Cryptocurrency: Coin Your Future

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Indian startups have begun to issue their own cryptocurrencies to raise funds

THE BENGALURU- based startup Drivezy has an interesting idea. The company envisages a time in India when people, at least a large majority of them, will not buy cars. They will instead share them. “Just think about it,” says its co-founder Ashwarya Pratap Singh. “A car spends a majority of its lifetime unused in a garage. Add increasing maintenance and fuel charges, and the vehicle’s depreciating value. It makes no sense.” There are other reasons too, according to Singh, which make sharing vehicles more attractive. The disparity in income levels in India means a large section cannot afford to buy vehicles. And among those who do have the money, the attitudes of the so-called millennials are different: like their counterparts elsewhere in the world, Singh says, they prefer shared access over car ownership.

What Drivezy offers as a solution is a platform that connects owners of vehicles and motorbikes to those looking to rent one for an hour or longer. The owner thus monetises the time his vehicle would have spent idle and losing value. The renter gains access to a vehicle strictly for the time he needs it, instead of having to hail a cab or have a vehicle of his own. Drivezy started as JustRide in Mumbai in 2015 with eight cars and has expanded to about 1,600 automobiles and 800 bikes in six cities now. Next month will see the service reach the National Capital Region and Hyderabad, says Singh.

The sustainability of the project, however, depends on the availability of a large number of such vehicles. It is a supply-intensive business, Singh says. To give it a fillip, Drivezy came up with a plan last year to buy its own fleet of vehicles that could be put up for rent. The founders estimated a budget of around $20 million for this.

In many ways, Drivezy is like a conventional technology startup. Not only does it address a problem in a novel way, question old wisdom and make use of modern technology, it has an engaging origin story. Singh’s brand new Ford Figo, which he shared with his flat-mates, got so badly damaged in an accident several years ago that he realised it made more sense to rent a vehicle instead. It also aims, like all startups do, to be ‘disruptive’.

But the real novelty of Drivezy is how it raises funds for the business. In the past, it was taking the usual route, with $16 million got from four rounds of Venture Capitalist funding. Earlier this year, however, for one-fourth of the $20 million it needs, it made an ‘Initial Coin Offer’, an ICO, on the internet. Another round is on its way.

An ICO is like a public offer, except that what’s on offer here is not an equity share but a digital coin or cryptographic token by which the subscriber can typically avail of the issuer’s services in the future (or some other benefit). The coins can also be traded on the internet, so it’s not necessarily potential customers but investors who are expected to subscribe to the issue. The ICO, after all, is an offshoot of the cryptocurrency idea, and the coins issued are expected to gain in exchange value once the business takes off and demand rises. Of course, if it fails, the value of the coins crash.

A digital coin issue is a way of raising capital without the hassle of meeting regulatory measures. It calls for neither collateral to be stumped up nor dilution of the firm's ownership

Conceptually, it is another form of crowd-funding. As some have put it, investing in ICOs is a bit like buying tickets to a movie from a filmmaker who promises to use the funds to make the film.

It is an easy way of raising capital without the hassle of meeting regulatory requirements for classic debt or equity funds. It calls for neither collateral to be stumped up nor dilution of the firm’s ownership. The proposal, however, needs to carry conviction with investors, who need to be assured of the project’s potential and the authenticity of the coins (enabled by encryption technology). The dream scenario for investors is that they’ll have the next Bitcoin if the business succeeds.

It is a risky proposition for investors, no doubt. For what they are really doing is placing their trust in an idea that may or may not get anywhere. But high risk is what investors looking for high returns are willing to take, and with an attractive pitch, a punchy website, some hype and clever marketing, it seems any startup can raise money this way.

Aditya Chavan, co-founder of another startup, Machaao, which is in the process of making a coin offer in April, believes the ICO model will redefine funding. He compares this moment to the early years of internet penetration. “The internet changed everything, right? It led to Amazon and what not. In the next five years, this is going to be the way all companies will raise money,” he predicts.

Globally, ICOs have caught on. Last year, 210 ICOs raised around $3.9 billion around the world, according to Coinschedule, an ICO listing platform and data provider, compared to $95 million by around 45 companies the year before. This year, despite the cryptocurrency crash that has raised some doubt over their survival in the formal economy, 88 companies have already raised $3.4 billion. Telegram, the messaging service registered in the British Virgin Islands, is in the midst of the world’s biggest ICO ever. According to Bloomberg, it expects to raise over $2.5 billion in three rounds of funding.

That’s a well-known service, though. Most coin offerers are not. Singh admits that most ICOs in the market right now are scams. “They have little paperwork in place, little idea about rules and regulations. It’s just an idea. And people are all going to lose money [on them],” he says. “In our case, however, we have a clear plan and a working model already.”

To raise $5 million earlier this year, Drivezy offered 12.5 million tokens called Rentalcoins, which entitle owners to a share of the firm’s monthly revenues; for the next round, it plans to issue 36 million more of these. Investors buy these coins by using a popular cryptocurrency, Ethereum. In a later phase of expansion, Drivezy hopes to launch Rentalcoins 2.0, expected to raise $100 million, which could be used to avail of its services. The company is currently tying up with several others across the world to provide sharing services. Further, the company hopes that Rentalcoins 2.0 will come to act as currency for a variety of other services offered by any firm ready to accept them as payment. In Singh’s words, “It is designed to work as a common economic system which can be used by any organisation operating within the sharing economy.” Owners of the earlier coins will be allowed to convert them into Rentalcoins 2.0 as well, in accordance with the company’s terms. To back its coins up with hard assets, in a sense, Drivezy offers coin-holders the option of encashing their holding: they would get the proportional resale value of its vehicles. “There is some apprehension about ICOs right now—their legality, about scams,” says Singh, “But we are doing it solidly, consulting lawyers and putting all the paperwork together.” The basic business, he claims, is already a success.

To raise $5 million earlier this year, Bengaluru-based startup Drivezy offered 12.5 million rentalcoins, which entitle owners to a share of the firm's monthly revenues

Proponents of this new means of raising money argue that while the concept may lend itself to fraud, ICOs represent a move towards financial security in the startup ecosystem. They base their argument on the logic of a common cause. Founders and coin holders, they say, are stakeholders with an interest in ensuring the venture’s success and seeing the value of the coins rise. They also see the idea creating the space for a disruptive company to emerge and challenge the current technology giants of the world.

Some of that sounds over-optimistic, but what cannot be denied is that there is a scramble among investors right now to spot the Next Big Thing. Since large sums of money in recent years have been made from a mere scrap of an idea, even from what began as a joke, anything that could possibly hit the jackpot has a good chance of attracting them. Stories of cryptocurrency wealth have played a role in the ongoing frenzy. One digital coin, called Useless Ethereum Token (or UET), whose logo is a raised middle finger and which is described by its developer as, ‘The world’s first 100% honest Ethereum ICO. No value, no security, and no product. Just me, spending your money’, managed to raise $40,000 in its ICO last year. Asked to comment by The New York Observer, the anonymous developer reportedly said, “I realised that people didn’t really care about the product. They cared about spending a little bit of money, watching a chart and then withdrawing a little bit more money. So why not have an ICO without a product, and do so completely transparently just to see what happened?”

In the West, celebrity endorsements have begun. Last year, the boxer Floyd Mayweather wrote on Instagram, ‘I’M GONNA make a $hit t$n of money on August 2nd on the ICO’. The company, an online prediction market platform, went on to raise more than $30 million. Others like Paris Hilton have also backed ICOs. Nothing whets the appetite for risk, it seems, than seeing others get rich quick.

Inevitably, regulators across the world are beginning to scrutinise the ICO model. China and South Korea have already banned it. The US Securities and Exchange Commission has issued guidelines on which tokens need to be classified as a ‘security’, subject to its rules and registration requirements. India so far has only taken note of cryptocurrencies, with a mention of them in the Finance Minister’s Budget speech outlining the Government’s general stance on them. They are not considered legal tender, he said, and the authorities would take appropriate measures to eliminate the use of crypto- assets in the financing of illegitimate activities. As a result of the ambiguity on the legality of ICOs in India, some startups conduct their ICOs by registering them in foreign countries (or they bar people of some nationalities). Drivezy’s ICO, for instance, barred Indian and Chinese citizens from subscribing.

Machaao, set up by five founders, two of them in Mumbai and the rest in the US, is a bot service on Facebook Messenger that focuses on cricket. It plans to expand to other sports later. The company claims to have more than 800,000 users, most of them in India, and the rest in other countries of the Subcontinent who are sent customised notifications and updates on the game. “Let’s assume, for instance, that there is an 18-year-old-girl who does not follow Test cricket but is a fan of Virat Kohli,” says Chavan. “So she can customise Ganglia (the service’s cricket bot) in such a way that she gets to know every time Kohli comes out to bat… and she can even get updates.” The platform also offers ‘Challenges’, a live prediction game where participants guess the outcome of a cricket match every few overs.

Machaao’s digital currency is called mTiME, of which it proposes to sell 500 million in three rounds of an ICO, priced in terms of Ethereum, Bitcoin, Litecoin, US dollars and Indian rupees. “What we are trying to do is kickstart [this part of the online] economy,” Chavan says. “The idea basically is that fans spend a lot of time following a game. And various platforms generate wealth from this activity of fans. But fans don’t get anything in return for the time put in. So we want to change that.” The plan is to reward ‘second screen communities’, or those following the game on Machaao’s platform, “based on monetised time as a store of value.”

Machaao’s tokens, Chavan says, could be used to consume new types of content on the platform: live feeds of a game in progress, for example. Or users could hold their own ‘challenges’ involving mTiME tokens, which the company claims are not ‘chance based’ (and thus not a form of gambling), since they take skill to win. What the company gains is a 10-per cent slice as a ‘processing fee’. Of course, these coins will be tradable, like other cryptocurrencies.

In general, most coins minted on the promise of a business model are likely to vanish in thin air, given that startups themselves have such a high failure rate. New cryptocurrencies too are a dime a dozen on the internet these days, thanks to last year’s Bitcoin boom (a concept that has many fans in spite of its recent slide). As with many other businesses, only the rare success will survive to thrive. But the ICO as a funding model, Singh believes, is here to stay. “I think in the future,” he says, “this is going to be the way all companies will raise money.”

Companies making coin offers have an interest in overstating the wonders of the concept. But how they fare will be watched closely. The traditional world of finance may be too stodgy to admit it, but it needs new ideas to shake it up.