A quartet of young companies from the Seattle area have raised tens of millions of dollars by tapping into a hot tech trend. They've invented new virtual currencies and sold digital coins to the public.
These token sales are largely unregulated and are sparking increasingly frequent government warnings.
Seattle-based Coinme is one of the companies backing its own digital-only currency. Coinme CEO and Co-founder Neil Bergquist envisions a "a crypto ATM on every corner, worldwide.” That means a bitcoin cash machine, basically, where anyone can buy or redeem virtual currencies with dollars and a driver license.
"When you have a trusted kiosk and a physical place with a 1-800 number, with a 5-star (review) on Google, that is how you can bring cryptocurrencies mainstream,” Bergquist said.
To achieve this vision, the four-year-old company needs money to expand its ATM network. It has about 40 bitcoin ATMs deployed now, concentrated in California, Texas and Washington state.
"We have done everything to finance this business to get to here,” Bergquist said with feeling. “Whether it's a bitcoin loan, or a revenue sharing agreement, hard money lending, LendingClub.com loans, credit cards, mortgaging houses."
But none of the traditional sources was nearly as fruitful as this new thing in tech circles—the "initial coin offering" or ICO. That sounds like IPO, an initial public offering of stock in a company, but it's not. It's more like crowdfunding. ICO purchasers get virtual money that can often be used like a digital coupon, but no shareholder equity.
"It really was a unique opportunity,” Bergquist said. “Well, let's engage our community of local crypto-enthusiasts, but also global enthusiasts who also want to give the world access to cryptocurrency. Let's engage them in the form of our own cryptocurrency."
Coinme raised nearly $19 million over two months in its crowd sale of its new currency called UpToken. You can’t buy things in the real world with it, but users get discounts or rebates on future ATM transaction fees.
Other area companies raised even more money in their initial coin offerings.
- Competitive video gaming—also known as esports—bookmaker Unikrn sold more than $31 million worth of a new currency called UnikoinGold that can be used for internet betting.
- StormX, Inc. netted over $32 million by selling it's Storm Token currency to use on a platform where freelancers can take on "micro tasks."
- A spinoff of the Walt Disney Company's tech center in Seattle called Dragonchain raised close to $13 million by creating Dragons, an alt-coin that can be used to buy business services. The CEO said the token sale proceeds are now worth much more because they were saved in rapidly-appreciating bitcoin and ethereum.
This all comes against a backdrop of warnings from regulators to investors to be wary.
"These are high risk products that have an unproven track record and obviously have high volatility in their prices that are reported,” said Faith Anderson, a securities lawyer at the Washington state Department of Financial Institutions.
"They are subject to little or no regulation. They are subject to cybersecurity breaches and outright theft,” she said. “You can in fact lose your entire investment in a cryptocurrency."
U.S. Securities and Exchange Commission Chairman Jay Clayton has also urged investors to ask a lot of questions and "apply common sense" before entering the rapidly growing cryptocurrency market. The SEC has cracked down on a handful of ICOs, none of which involved Pacific Northwest companies.
Anderson sees signs of "a lot of speculation, which raises a lot of concern." But she's not pointing fingers at any Pacific Northwest cryptocurrency issuers.
Those companies say they're glad that federal and state regulators are watching out for frauds. For regulatory compliance reasons, several of the CEOs insisted consumers should not treat the digital money they coined as investments.
"A Dragon is not a financial security and should not be purchased for investment or speculative purposes," Dragonchain CEO Joe Roets said in a slide presentation for token pre-sale audiences.
But many token buyers from all over the world have an investor mentality judging from online comment threads at popular cryptocurrency message boards on websites such as Reddit and Telegram. The buyers anticipate handsome profits from trading the virtual currencies on secondary markets.
University of Kansas student Shaher Ibrahimi said he bought the equivalent of "a good, used car's worth" of Coinme's new UpToken currency during the initial coin offering in December. Ibrahimi said he got in on bitcoin earlier, but this was the first ICO he participated in. He liked that Coinme had a business track record and is U.S.-based.
"There are a lot of initial coin offerings that are BS," Ibrahimi said. "You have to kind of get through the weeds and figure out what is a legit company and what isn't a legit company. There is no doubt about Coinme."
"Since we're in the early adoption stages... my intuition said this is a good investment,” he added. “There is going to be some risk involved, so you have to keep track of it. But it has a lot of potential.”
Sure enough, the value of three of the four locally-invented tokens shot upwards after they recently started trading on cryptocurrency exchanges. But since then it’s been a wild ride on the markets with volatility on stark display.
The Unikoin Gold, Dragon and Storm cryptocurrencies plunged early this week in a sector-wide selloff. Uptoken is not yet trading.
The website CoinMarketCap.com tracks 1,450 different cryptocurrencies, most of which are less than a year old. Actions by regulators overseas—notably in China and South Korea—to crack down on what they see as an investment craze contributed to Tuesday's plunge in cryptocurrencies.
For ICO issuers, it may seem like manna from heaven to jump on the internet money bandwagon, but Coinme CEO Bergquist disagrees. He said with a weary sigh that his company's token offering was a "consuming process."
"The easy money is gone. It's not easy anymore. It is a massive effort" to break through the ICO noise, Bergquist said in an interview after the token sale closed.