Why the biggest cryptocurrency bonanza might just appeal to family office investors

Photo by alfexe/iStock / Getty Images
Photo by alfexe/iStock / Getty Images

Filecoin, which will be the biggest crypto-token sale so far when it happens Thursday (August 10), is open to high net worth individuals and accredited investors only – a source of some dismay to much of the computer science community who support these sorts of crowdfunds.

Restricting the sale to investors with at least $200,000 a year or $1 million in liquid assets is a way of meeting an exemption in US securities law. Initial coin offerings (ICOs) have become a big trend in the public blockchain world. Blockchains are large networks of computers synced together to verify and time stamp transactions without the need for a trusted central party running the network. The best known of these is the Bitcoin blockchain.

We are now into the second phase of the blockchain universe which was arguably kicked off by the creation of the Ethereum blockchain system. Ethereum allows for more flexible applications - not just spending or moving coins - to run across its decentralised network. Indeed, people sometimes refer to Ethereum as “the world’s computer”, as opposed to Bitcoin’s global pocket calculator.

Filecoin rather like Ethereum will be a game changer, and people know it

Ethereum allows users to lock up its native currency (ether) in automated digital contracts, which can then be disbursed according to rules programmed into the system. Ethereum has been a bit like The Velvet Underground: everyone who saw them started a band. So today we have lots of blockchains emerging with their own tokens, many of them backed by Ethereum tokens. People have been given the chance to crowdfund these new networks by buying their tokens in advance.

These tokens can be compared to purchasing a software licence for a system that’s yet to be built, and they can be traded on secondary markets for other cryptocurrencies, or indeed cashed out as fiat currency.

More money had been raised in the last few months by ICOs than through traditional venture capital investing. Clearly, the reason many people are lining up to buy these tokens is speculative. This means many of them could likely be classed as securities. This, in turn, would require the issuer to register with the US Securities and Exchange Commission if they want to raise money in the US (which of course none of them has done). The SEC recently provided some guidance on this, but it remains a very grey area.

This is why Filecoin has chosen to be the first token seller to placate the SEC by seeking its accredited investor exemption. A word about Filecoin: it’s a blockchain grounded in an esteemed and long-standing technology team, executing a solid use case, decentralised file storage. Filecoin is linked to the well-known inter-planetary file storage (IPFS) protocol devised by computer whizz Juan Benet.

Decentralised file storage sets out to disrupt expensive centralised file storage operators like Amazon’s S3, by paying people to host and share files using the vacant disk space found all over the internet, but at a fraction of the cost.

Filecoin rather like Ethereum will be a game changer, and people know it. The sale is estimated to raise as much as $1 billion. There are a complex investment vehicle and vesting process, which means a minimum of six months before tokens are issued. More about this can be found on the Filecoin website. Many crypto enthusiasts felt angry and let down at being excluded from the token sale. But accredited investors, HNWIs and professional crypto whales probably welcomed the news.