Successful ICOs need backing from strategic purchasers: Mike Kayamori, Quoine

Mike Kayamori at DEALSTREETASIA's Asia PE-VC Summit 2017 in Singapore.

At a time when the sector is facing a lot of regulatory scrutiny globally, Mike Kayamori, chief executive officer and co-founder of Quoine, is bullish on the prospects of the ICO market in the coming years.

He sees Asian regulators like Japan and Singapore further refining and clarifying their regulations surrounding virtual currencies and digital token offerings.

Quoine is among the major players in the blockchain/cryptocurrency space in the the Asia Pacific and claims to be the largest cryptocurrency exchange in Asia, excluding China. Kayamori claims that its cryptocurrency exchange sees in excess of $100 million in transaction volume per month.

The company plans to expand its offerings into payments, remittance, and financial services, as part of a strategy to provide financial inclusion to the growing middle class in the Indo-Asia Pacific and the underbanked communities.

In an exclusive interview with DEALSTREETASIA, Kayamori discusses his firms’ initial coin offer (ICO), growth plans and regulatory environment.

Edited excerpts:

Your initial coin offer (ICO) earlier this year was over-subscribed. Could you discuss the reasons for this strong performance and how this will shape the growth plans of QUOINE from now till 2020?

The key success factors are due to the macroeconomic environment. At this point, there is a fair amount of ICO fatigue and also it’s now becoming increasingly clear what is a security, and what is a utility when it comes to digital tokens. And then the third point is there are countries that are starting to ban ICOs.

So this takes away a chunk of the ICO participants, as we see China.

Despite that, there’s a more than 200 ICOs that are ongoing right now, and a lot of them aren’t hitting their targets because of those reasons. We were fortunate because our value proposition was really unique. We’re solving a real problem, which is liquidity in this ecosystem.

If you’re a Bitcoin or Ethereum investor then you’re okay, but if you’re a holder of one of the thousands of these tokens, you lack liquidity. So we’re building a platform where we connect all these liquidity silos into one.

So, even if you have a minor token, if you’re offered a listing on some other cryptocurrency exchanges, we can combine it together to make it one big trading platform. So I think our product resonated with many people. Our ICO also had a good mix that saw a breakdown between institutional and public purchasers.

Who were the cornerstone backers for this ICO?

Our liquidity partners were other exchanges because they support and their core business resonates with the liquid platform. A year ago, this would not have happened because we were competing to capture the same user base. But now we know that liquidity is a major problem and we all help each other.

The beauty of fintech now is that we’re much more collaborative. So our strategic partners participated in our ICO, which gave us a good balance for the entire capital raise during the ICO. Half came from these strategic partners while the other half came from retail investors.

Bitfinex was one of the major partners backing us and we have a good relationship with them. They participated in our QASH token sale and will list our token on their exchange as well. So from that perspective, it’s a win-win-win situation.

For a successful ICO, you need the strategic buyers who can be long-term holders to come into the round and ensure you have a foundation. And then you open up to the public, where retail investors who believe in your vision and want to contribute to your platform.

Being a former VC and now an entrepreneur, could you tell us about the impact of ICOs on the venture capital sector and how you see it evolving?

I’m an entrepreneur now and, prior to that, I worked as SoftBank as a venture capitalist (VC). So when I look at entrepreneurs, their options to raise capital are always limited. It was either friends and family at a very early stage, or you go to VCs, or you get a debt from banks. It was very much limited but now you can raise funds from the public and a community that really supports your vision and wants to contribute to your product from the beginning.

So, that’s an option that everybody should embrace. And that’s why as an aspiring entrepreneur if you have the confidence to raise capital through a utility token sale, that’s something you should pursue. And VCs need to embrace that.

The traditional VC approach where you invest $1 million to $2 million and get 30% of the company – that’s no longer the case – and it’ll still be there. But entrepreneurs with a sufficient personal brand and recognition can probably raise funds from the public from day one.

Typically, at such an early stage, 90% to 95% of startup ventures will fail. But, the big ones will successfully emerge. So there’s always going to be a shakeup in any industry, but ICO is here to stay. That said, a utility token sale will not be for everybody.

A year ago, ICOs weren’t even in the nomenclature. A year later, what’s going to happen? Nobody knows. But one thing that is clear is there is going to be an equity token as a form of tokenised security because the utility token is not going to be for every enterprise. And with that being said, raising from the public or other relevant community is going to be the new norm.

For those types of projects, it has to be equity tokens. But for equity token or securities, it needs to comply with the various government regulations involving securities.

The PE/VC space saw two funds – Finshi Capital and Starta Accelerator – using an ICO to raise their funds. What’s your take on this development? 

VCs, both new and old, whether they’re traditional players or emerging players, need to embrace this phenomenon.

When I was doing an ICO myself and building a community, I would conduct an AMA (i.e. ask me anything) almost every other day. And people are asking the right questions: “Why are you raising this much? What’s your unique value proposition? How are you different from your competitors? And why are you going to be successful?”

So that’s a lot of work and if that could be a filter where VCs can come in, undergo that process in terms of managing their investor relations with people participating in the ICO, that’s a big opportunity.

Right now, VCs or PE fund managers can only raise funds from accredited investors. When they raise funds to invest in ICOs or startups, they can raise from the public as well. It’s a big opportunity and the ICO token sale process can be the filter that aids in that decision of which ICO has a higher probability of success, as VCs have been looking at a lot of companies themselves.

Recently, the MAS has updated their regulations and guidelines related to cryptocurrencies and digital tokens. And if there’s a collaborative investment strategy of raising funds through an ICO, it’s a security that has to comply with the Securities & Futures Act. If an ICO fund does profit sharing or does a distributed profit through the fund, they’ll need to comply with each country it raised funds from.

With Quoine LIQUID, you are likely to see both listings, utility tokens as well as equity tokens. How do you see equity tokens interacting with the environment of that marketplace? 

We have three platforms at Quoine: there’s QUOINEX, a crypto-fiat regulated exchange; CryptoX, crypto-only ICO exchange platform; LIQUID, which is more for institutional investors. We believe that equity tokens and utility tokens need to be separated.

With utility tokens, we can scale and provide that service internationally as its utility is related to goods and services. But if its an equity token, we need to comply with each jurisdiction.

In Japan, we are talking with the Financial Services Authority and they’re open to equity token exchanges, but that needs to be a separate exchange open only to Japanese residents who want to participate in equity tokens and needs to be licenced. In this case, for entrepreneurs who want to issue equity tokens, rather than just going to VCs, they can raise it from the public and within that exchange, there’s going to be a robust secondary market.

There also are jurisdictions like Estonia and Gibraltar which are progressive and want to become the preferred equity token exchange destination, and this development will accelerate. It’s going to be interesting to observe, but there will be limitations and restrictions on who can participate in those equity token exchanges.

Coming down to the regulations, right now we’re seeing there are two countries in the Indo-Asia Pacific that have crystallised their ICO regulations more than their neighbours, and these are Singapore and Japan. Given that QUOINE has roots in both countries, could you perhaps offer perspective on the different regulatory environments and how you see them evolving?

Actually, Japan and Singapore are very similar how they approach it. And their regulations are generally aligned with US SEC announcements; if it smells and looks and talks like a security, it’s a security.

Japan was the first one to regulate ICOs ad cryptocurrencies at a national level because Mt. Gox happened in Japan. So they can’t allow that to happen again. And the outcome was a sense of urgency for them to have a national regulatory framework around cryptocurrency exchanges.

So they looked at it from a payments perspective and revised Japan’s Payments Act to incorporate virtual-currency exchanges into that with specific guidelines and regulations around how virtual-currency exchanges can operate in Japan.

I was actually pleasantly surprised at how the Monetary Authority of Singapore (MAS) is looking they were looking at it from a very similar angle, rather than from a derivatives’, commodities’ or even forex perspective. So I’m very keen on how the MAS will handle that going forward. But it’s very clear that they’re taking a similar route as the Japan FSA, which is targeted at how people are using cryptocurrencies.

A common criticism of startup ventures that conduct ICOs to raise funds is the strong risk of over-capitalisation. How do you see it impacting a liquidity even or the exit potential of a startup, say through M&A or an IPO? 

When a founder is given excess cash, they always find a way to use it. The most important thing as a startup is to be prudent, nimble, fast, and a lot of that changes when you have too much capital.

That said, I’m actually a big believer in an ICO, in that it is maturing and self-selecting. A lot of the ICOs are having difficulty reaching their targets now and this is a good thing. The market itself and the investor community is learning at a rapid pace that over-funding is not a good thing. So when you try to do an ICO, the community will ask you: “Why are you raising this much? What are you going to specifically use it for? What are your long-term plans?”

So all of these things are kicking in and impacting how much you can actually raise. In the past, information awareness was asymmetrical and fragmented.

The beauty of ICO is the need to build a community and raise funds from that community, which are more knowledgeable about other ICOs and the other things that are happening elsewhere. So it’s becoming more of a self-regulating capital-raising exercise and that’s a good thing. Going forward, I’m not worried about the over-funding issue.

QUOINE raised about $20 million in 2016 and has raised $106 million with the ICO. In general, how do ICOs impact the valuation of a company, given that the tokens are a separate entity issued by a foundation?

That’s a very good point because it will come into your balance sheet. So we raised an aggregate of $20 million via traditional equity fundraising. And fortunately, because we’ve been profitable and growing, we still have that $20 million in the bank.

We wanted to build this liquidity platform where we need to have reserves in our partner exchanges because we’re didn’t raise this much for product development. We’re going to use half of the ICO proceeds as a reserve in our balance sheet. And over time, we’re going to see that 80% will go towards our public investors and 20% to the shareholders and management.

As for valuation from ICOs? That will come on a corporate balance sheet, so the value of the market cap of the token of which the company owns will be part of the value of the company. That said, from the global accounting perspective, the question is how to incorporate the value of the token in your balance sheet. Is it an asset, an equity or is it somewhere in between? Those are points that need to be discussed and formalised before the ICO is sold to you.

With the current cash pile that QUOINE is sitting on, do you plan to pursue any inorganic growth through M&A or strategic partnerships? 

The important thing is to create value, and also time to market. So if that means there’s an interesting team or technology we can incorporate on our QASH blockchain, that is something we will use our funds for. So it will be case by case.

We do have a fiduciary responsibility to utilise the capital that we raised in a way that will create value. So from that perspective, if there’s an interesting startup, if there is an acqui-hire or a significant partnership, we will use that token in the most efficient and productive way.

Down the road, what is QUOINE’s exit path? Are you looking to be acquired, or will you be exploring a public float on the Tokyo Stock Exchange in the medium term?

I don’t look at traditional public markets like the Tokyo Stock Exchange or SGX, or even NASDAQ. To me, that’s also a traditional exchange,

I believe there’s eventually going to be an equity token exchange and that’s where we might look into listing our securities. So right now, Quoine offers a utility token exchange, but I think there’s going to be a robust equity token exchange as well where everybody can participate. So to me, keeping options open is the most important thing.

That said, we’re not looking for M&A or acquisitions as part of an exit. We’ve already been offered to be acquired and I don’t see that as an option. I think this crypto-token economy is here to stay and it’s only going to get bigger.

When traditional financial institutions or banks have hesitation coming in, that’s an opportunity for us to grow. I think we’ll be too valuable and expensive for traditional banks to come and acquire us. So I reckon we’ll be an independent company. How we go public, whether through traditional stock exchanges, or a future equity token exchange, is to be seen. It’s exciting times.

Also Read:

Japan’s Quoine raises $105m in oversubscribed ICO

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