William Essex
William Essex

Getting to grips with ICOs

William Essex explores whether or not blockchain-based tokenised liquidity platforms will justify the “hype” and disrupt the traditional retail FX-trading model.

First Published: e-Forex Magazine 79 / Blockchain and CryptoCurrencies / December, 2017

Jim Preissler

Jim Preissler

“The time has come where people take back control of capital markets and reject the status quo.”

We need to talk about ICOs and we need to talk about retail FX. Barriers to entry are not a significant issue at the retail end of the business, and early adopters of new-tech retail trading mechanisms don’t have to start by discussing legacy systems and processes. These days, frequently enough for it to matter, what happens in retail sooner or later comes around to the rest of us.

ICOs – initial coin offerings – are where new-ish technology - blockchain, of course - meets the traditional business of exchanging a representation of value in one currency for its equivalent in another. ICOs are not significant purely because they use the blockchain, but we’ll make that our starting point today. Blockchain enables flexibility in the design of the business model, and it’s fair to say that it’s also liberating for the writers of marketing literature. So will blockchain-based tokenised [see the box ICO/ITO?] liquidity platforms will justify the “hype” and disrupt the traditional retail FX-trading model? This is the judgement call that we’re about to make.

Suddenly we’re outsiders

One “plan to disrupt the existing financial status quo” via blockchain (quoting the marketing literature) that’s coming to fruition as we speak is the “advanced financial exchange based on blockchain technology” (ditto) trade.io’s November/December 2017 ICO. This is the first stage of an initiative to “democratise the markets” in a range of asset classes including FX and in the process to eliminate “tremendous fees and inefficiencies”.

First point is that a “democratised” market is a market with a lot of people in it who weren’t there before. If this and other initiatives work as they’re intended to work, the FX market will open up to a whole range of new counterparties, many of whom will know what they’re doing and almost all of whom will have a sophisticated understanding of their “new generation” (my term) trading tools. Jim Preissler, CEO, trade.io, says: “The time has come where people take back control of capital markets and reject the status quo. This is not just about distributed technology- it’s about distributed wealth through our peer-to-peer shared liquidity pool.” That’s a crucial point. It’s not the technology, nor is it just what you do with it. Equally significant is who’s doing it.

So trade.io’s success would be to drive down costs, streamline the trading process, and bring in a lot of new players who would constitute, let’s say, a distributed “democratic” network of trading counterparties. For the rest of us, and here’s a significant issue, the way into that kind of market might not be to come in on the basis of experience, track record, et cetera. One of the wild cards in the ICO space is that peer-to-peer (distributed) networks tend not to be looking to trade with outsiders. 

Not to overstate the point, but there are some powerful arguments for (so to speak) getting with the people on this latest disruption. Not to push a specific ICO either, you understand, but to get familiar with the process and the disruption all such initiatives might bring, and perhaps even to find a way to, excuse me, join the party. Here goes.

trade.io, aims to use Blockchain technology to disrupt the market-making broker model.
trade.io, aims to use Blockchain technology to disrupt the market-making broker model.

Seeding the pool

An ICO in the FX-trading space is typically an exercise in selling participation. It will be blockchain-based, and [again, see the box ICO/ITO?] it won’t provide you with an ownership stake in a new trading model. To take the trade.io ICO as our first example, this promises “not only trading of multiple asset classes [on the trade.io exchange], but a more efficient listing of assets in the crypto economy under the indelible and trusted history that the blockchain provides.” No surprises there. But this is a peer-to-peer trading platform “where participants can share in the profits of the exchange”. You buy your “TradeTokens”, and then “participate in the forthcoming liquidity pool and potentially receive pro-rata daily disbursements of up to 50% of the pool’s profits based on performance”. Preissler says: “We intend to seed the liquidity pool with approximately $50 million cash, as well as 50 million TradeTokens. All participants will share 50/50 from our seed contribution as well.”

To complete the details, trade.io’s ICO comprises an offer of up to 275 million Trade Tokens. Over 45 million have already been sold at PRE-ICO and the remainder will be available during the ICO which started on 7 December, until 4 January. Fiat-currency payment acceptable, and for approximate reference only, you could get around USD460 for your 1ETH on the closing day of the pre-ICO. A late-November check of the trade.io website suggested that buyers had been buying. Early adopters of the trade.io platform and technology include two regulated brokers, FX Primus Europe (CY) Ltd and Primus Capital Markets UK Ltd. Preissler says: “Ultimately, trade.io will be a trading platform for not only crypto assets but also Forex and CFD’s over precious metals, oils, commodities, index’s and global equities and any number of potential assets.”

The SPECTRE model Note: The above is a snapshot of the SPECTRE business model. 2% dividend payouts to token holders are in reference to  SPI CIRI’s dividend-token and do not accrue to SPI CIRI’s utility-token which has different dynamics.

The SPECTRE model

Note: The above is a snapshot of the SPECTRE business model. 2% dividend payouts to token holders are in reference to  SPI CIRI’s dividend-token and do not accrue to SPI CIRI’s utility-token which has different dynamics.

Now we move on to SPECTRE, the Speculative Tokenized Trading Exchange, which was also running a lively November/December 2017 ICO at the time of writing. SPECTRE, you won’t be surprised to hear, “removes the broker from the equation and returns the power back to retail traders across the globe”. The ICO offering comprised “utility tokens”, which carried a number of benefits including eligibility for a buy-back programme (thus removal of supply and potential price appreciation), and “dividend tokens”, which pay a volume-based monthly and annual return to investors against a relative downside of potentially lower liquidity. Karan Khemani, CEO of SPECTRE, says: “There is a pressure point in the system that doesn’t go away, and that is the broker.” SPECTRE is designed to eliminate any potential conflict of interest between broker and trader.

In a discussion of blockchain-specific features of the platform, Khemani continues: “SPECTRE allows you to trade peer to peer or against a giant decentralised and autonomous liquidity pool. This replaces the broker entirely. There is no human intervention or possibility of fraud.” All transactions on SPECTRE are governed by smart contracts, which has the effect of removing the broker from the equation, as Khemani says, thus “ensuring a new level of trust and transparency in financial trading”. Khemani also refers to SPECTRE’s “financial academy”, accessible via the utility token, whereby traders can work towards raising their win rate towards the 60% minimum necessary for sustained profitability. SPECTRE offers a range of “trader-protection algorithms”; these enable traders to track their stats including strengths and weaknesses through time. Using these algorithms, SPECTRE “alerts traders when they are about to make a silly mistake”.

So far, so depressing for FX brokers. It’s as if the future is being marketed largely on its capacity to remove them from their livelihoods. But let’s not despair just yet. The traditional brokerage model may be going through disruption right now, but as the old saying doesn’t quite go, if we’re not sure we can beat them, we could always think about joining them. This is, after all a lively party.

Get your DAxT together

If all you need for happiness is a “multi-asset trading platform built for next-generation assets and securities” that enables its clients to run their own ICOs, you might want to look at BlockEx. Or Lykke, which is discussed in the box As You Lykke It. Focusing here on BlockEx, the company is (was), you might not be astonished to know, running a November/December 2017 ICO of its own (ending 31st December). BlockEx’s mission is to “trim the fat from the financial-services industry”, and as part of this, the company has launched the Digital Assets Exchange Platform (DAxP), which is (we’re back with the marketing literature again) a “global marketplace for all asset classes and instruments using distributed ledger technology”. You buy into this by what is fast becoming the usual way – by buying one or more Digital Asset Exchange Tokens (DAxTs, at EUR1 each), and what these do for you is, they “disrupt the ICO market by guaranteeing fair and transparent access to ICO distribution”.

IDAXT concept
IDAXT concept

The phrase “get your own back” will not appear in this article. We’re above such thoughts. But one feature of the DAxP – the platform – is that you can use it to host your own ICO; the DAxP can be white-labelled. So if you’re an FX broker with an idea for a not-a-brokerage-at-all, transparent, not-intermediated-even-slightly blockchain-based facility for retail (and in this case, institutional; BlockEx has scale) traders in FX, you might want to think about – completing this sentence for yourself. Just saying. The DAxP “manages the entire lifecycle of blockchain-based assets, including origination, issuance, exchange, settlement and redemption”. You can create your own digital assets, including ICO tokens. It is, inevitably, “set to disrupt antiquated systems within the traditional financial world, while bringing exciting new financial products into its sphere”. Possibly even your exciting new products. Oh, and it’s regulated.

Not altogether surprisingly, Adam Leonard, CEO, BlockEx, has described blockchain as “one of the most transformational technologies of the 20th century, powering the fourth Industrial Revolution”. In a discussion of BlockEx’s launch and development, Leonard says: “Back in 2013 most exchanges were built by Bitcoin enthusiasts for Bitcoin enthusiasts. The thought was if we built an exchange that operated in the same way as existing brokerages, day traders would start to trade Bitcoin.” Time passes and markets evolve and so do attitudes to disruption. These days, the value of blockchain is not so much that it displaces traditional business models. Instead, the trend might be towards a form of “inclusive disruption”, in the sense that the technology we’re beginning to use enables all of us. Leonard now talks about BlockEx “helping to draw ICOs and tokens into the traditional financial world,” but perhaps the opposite is also true: the financial world is being drawn towards ICOs and tokens.

Or if that seems too literal, perhaps the significant potential change, looking beyond the technology itself, is in the mindset. Every sponsor of an ICO – and every writer of marketing literature in this space - finds a form of words that amounts to democratisation, or widening the market, or opening up to more customers. And what all of them are saying, in the final analysis, is that what the future holds – is more traders.