I have a close friend whom I will call “Tal” who is a great tech entrepreneur with a strong track record for building applications in financial markets. Tal is smart, worldly and tech friendly. He also thinks blockchain is bullshit.
As regular readers of this blog can imagine, we argue about the significance of blockchain, cryptocurriences and distributed ledger technology. Tal may be right. His argument boils down to (i) blockchain is a solution in search of a problem and (ii) nothing of real commercial value has been built to date. My view is that these remain early days in the development of a set of promising new technologies. While there are significant technical challenges, including scalability, security and performance, it is wrong to write-off blockchain today based on an early snapshot of its utility.
In Blockchain, Coase and the Theory of the Firm I argue that blockchain fundamentally changes the economics that dictate which activities are performed within a company and which can now be undertaken by individuals via contract. The key change is the reduction in transaction costs that makes new forms of economic organization possible.
In this post, I argue that initial coin offerings (ICOs), made possible by tokens represented on a blockchain, will breathe new life into traditional forms of organization such as the mutual company or cooperative society.
Coin offerings are all the rage these days among cryptocurrency enthusiasts, serious founders, as well as online scammers. In 2017 an estimated $4 billion equivalent was raised in ICOs across several hundred offerings worldwide. Coin offerings have been banned (at least temporarily) in countries including China and Korea, and are under close watch by the SEC and CFTC in the US as well as the FCA in the UK. However, my interest is less regulatory and more based on the innovation that token sales represent in the form of economic organization.
In a coin offering, investor/participants are offered the right to purchase cryptocurrency-based coins or “tokens” that confer the right to participate in the economics and/or governance of a project. Unlike a traditional equity offering such as an IPO, the project need not take the form of a legal entity such as a corporation; however, the tokens purchased in this novel form of offering do represent the right to participate in the success of the venture. It is this collective aspect that suggests to me that ICOs owe much to the history of economic organization.
Mutual societies or benefit companies are ancient forms of collective organization dating to Roman Imperial times. They reached peak adoption in the 19th and first half of the 20th centuries as many savings and loan societies and life insurance companies were organized as mutuals (See e.g., Mutual of Omaha Insurance Company in the US and Nationwide Building Society in the UK.). Mutual companies are owned by their members and run for their benefit. Profits are typically reinvested in the business to improve the services offered to members or returned to members in the form of lower prices or distributions. This may provide a certain marketing benefit by convincing customer/members that their purchases are not going to line the pockets of a separate class of investors. Mutual organization is also seen as reducing agent/principal conflicts and information asymmetries (especially in insurance). However, the lack of access to investment capital (and perhaps the chance to profit personally) convinced the managements of many former mutual companies to “demutualize” over the last few decades.
Coin offerings provide the potential to reinvent the mutual company on a modern infrastructure or “set of rails.” Individual projects or series of projects organized as a company can be financed via ICOs; follow-on investment can take the form of subsequent token sales; and customers of the business can be rewarded with participation through token awards.
So while I still disagree with my friend Tal about the importance of blockchain technology, he is correct in the sense that it does not magically create value out of nothing. It is a powerful enabler and a radical reducer of transaction costs, but it may be no more novel than your average 19th century English mutual building society. As the poet T.S. Elliot wrote in Little Gidding V:
We shall not cease from exploration
And the end of all our exploring
Will be to arrive where we started
And know the place for the first time.