James W. Marshall is a name that is embedded in folklore and US history that most of us will never have heard of. The humble carpenter from New Jersey was working in the American River at the base of the Sierra Nevada mountains in Northern California as part of a team working to build a water-powered saw mill for a local entrepreneur, John Sutter. On January 24th 1848 in the flowing river, Mr Marshall discovered something that would change the whole region forever — flakes of gold. From its humble epicentre in a Northern California river, the Gold Rush was born.

Like any great ideas, in the pursuit of great potential wealth, it is the entrepreneurs and innovators that tend to fill the vacuum first — often based on limited information. In 1848, the first pioneers were people close by and, as information spread further afield so people came from within the United States and in 1849, people from across the world arrived (called “the 49ers”).

Of the estimated 300,000 that pursued the California gold rush, over half are said to have arrived by boat. It was the flow of information that determined the speed at which these opportunists arrived. At the time, information was limited and the information flow was painfully slow. If the internet had been around at the time imagine how much quicker this gold rush would have been. It is this issue of speed that determines why the regulators will need to get on top of the current ICO bubble as quickly as possible. To see why, let’s compare it to the dot-com bubble of the late 1990’s.

Google, eBay and Amazon all have one thing in common. Besides being household names that took years to become profitable — none of them could have existed without the internet. Like the 49ers before them, who prospected for gold by painstakingly breaking rocks and pan-handling slurry, in the mid 1990’s we endure the craziness of the time that was re-labelled posthumously as the “dot-com” boom and bust.

To the outside world, it appeared that all you had to do was to add an “e” to your business and “.com” after your name and you had queues of investors waiting to throw free-flowing funds your way. Today, we are re-cycling history by make some basic grammatical changes so familiar to Year 3 English classes.

Almost by adding the word “decentralised” to your business and adding the suffix “with the blockchain” you can announce your ICO (Initial Coin Offering) to the world and have throngs of people from around the globe throwing cryptocurrency funding at you.

According to Coindesk.com almost $2.37bn has been raised via ICOs since 2014. $1.9bn of this (c 80%) was raised in the 5 month period May — September 2017.

The problem is the speed at which the ICOs have taken off. Whilst there are many unifying features that link ICOs and the dot-com bubbles, underneath things were very different .

Nature of the projects. The dot-com era was brutal — it was Darwinian. It was survival of the fittest. For every vertical market, there were around 3–5 major websites chasing the advertising and e-commerce dollars. It was about hitting the numbers to get your next round of funding. No results meant no funding — it was binary. While there were allusions to “co-ompetition”, where competitors worked together, in reality, it rarely happened. Technology was kept internally — it was every man or woman for him or herself. Most ICOs are different.

The majority of ICOs are by their very nature “open-source” projects. Open-source means the “community” can benefit from having access to the technology and the underlying code that is freely made available. It means that new products can be developed quicker, communities can grow quicker and ultimately the underlying ecosystem can expand quicker. Whilst ruthless competition exists, the blockchain community has a constantly improving body of work that can drive the whole ecosystem forwards to greater things at a far faster pace. This access to open-source software is an absolute necessity for the whole ecosystem because of its distant line of sight to viable revenue streams.

Line of sight of Revenues. Dot-com websites were fixated on eyeballs, advertising revenues and as payments-based technologies began to be developed, e-commerce revenues. There were very clear revenue streams to be had. Eyeballs and advertising revenues were the metrics that acted as the conduit to the next round of funding. With ICOs, on the other hand, the underlying blockchain technology is very immature and very, very raw. It is so young there is doubt that much of the technology being touted within ICO’s whitepapers may even be able to work. This presents commercial challenges for viable revenue generation opportunities.

Significant revenues will typically come from partnerships with Corporates and Institutions. After all, they have the finances, the distribution and market presence to take any new technology to a ready and willing market. The problem, however, is that unlike the dot-com era, blockchain technology is not creating a new channel to market, rather it is creating new infrastructural layers, especially within the financial services sector.

Whilst it all sounds great for Santander InnoVentures to say that financial institutions could save up to $20bn from blockchain technology implementation (Fintech 2.0 paper : rebooting financial services; 2015), the actual implementation of these infrastructural changes has immense challenges. After all, are Financial Institutions going to throw out their entire internal legacy systems just because a new technology shows its face? Whilst blockchain technology has great benefits, financial institutions and larger organisations cannot move quickly to adopt new technology or to generate revenues from their customer base through its adoption — all because of risk, which is built into their very DNA.

Financial Institutions will not adopt new technologies without thorough testing, auditing and ensuring compliance is completely micro-managed . No institution wants to incur the financial wrath of global regulators, especially in the USA; the risks of failure are simply too high. Not only have fines been imposed in the billions and the loss of US banking licences threatened, but also from a long-term perspective, trust with customers can be lost in a heartbeat. As Oscar Wilde once said — “confidence is like virginity — you lose it only once”. As a result, with very few exceptions, the majority of mainstream commercial implementations within the finance services sector are at least 18 months to 3 years away. We are still in the 3 P’s phase — the Proof of Concepts, the Prototypes and the Pilots. These are far from generating sustainable revenue opportunities.

Equally, merely because we say a new product is associated with the blockchain does not mean it has significant advantages to the end customer that needs to pay for the product. No-one really cares about how the water comes out of the pipes — all they want to know is it comes out of the pipes. Furthermore, in the world of start-ups, it is about solving problems; problems that customers will pay for.

To overcome the natural lethargy that exists for us all to change away from an incumbent solution, we need things to be faster, cheaper, better — and significantly so. Just ask yourself what would it take to draw you away from Facebook? Peter Thiel, the seasoned investor, is often quoted as saying start-ups have to be 10 times better than the second best in the marketplace. Can this really be said of most blockchain based startups and ICOs?

While there will always be exceptions to the rule, very few ICOs will be 10 times better than incumbents merely because they are implementing a new technology. As a result, I would argue that very limited revenue generating opportunities will be available — and, where they do exist, they will probably be from niche audiences that can have a habit of being self-referential — e.g. within the (very small) crytpocurrency community itself.

These limiting revenue streams are made worse by a secondary infrastructural challenge within the funding structures of ICOs.

Funding Structures of ICOs. In the dot-com era — the only real funding sources available was from angel investors and professional funds — primarily Venture Capital. With Venture Capital came discipline, where funds were dispersed piecemeal against agreed milestones. Information memorandums were produced, and there were regulations around finance raising. With ICOs, currently at least, access to the capital pool is less demanding, less structured, and global.

It is easy for anyone investing in ICOs to get involved if they want to. Once you go through the initial pain of converting your domestic currency into crytpocurrencies, individuals can invest into an ICO in only a few minutes. This can be done by simply transferring crytpocurrencies from one cryptocurrency address to another — mostly anonymously, and globally. Once committed, transactions cannot be reversed. It is a culture of caveat emptor. This means global capital is so much easier to access — and it is entirely democratic. Almost anyone with surplus funds can support an ICO they feel comfortable with. Despite geo-blocking and terms and conditions stating certain countries are banned from supporting a given ICO, VPN’s (Virtual Private Networks) can help ease the smooth flow of capital. These global funds do not have the same expectations or control mechanisms that professional funds and funders have.

Now, whilst many of the larger ICOs are increasingly bringing professional investors on board, much of the funding seen in the ICO space has been from both seasoned cryptocurrency community-based investors who probably understand the benefits of the core technology, and might even be familiar with some of the team behind the project. This is then typically supported by uninformed funds often driven by FOMO (the fear of missing out) drawn in by the herds of lemmings all pursuing new found riches. This means that much of the pool of funds is global, easy to access and asks less questions.

Easier access to Technology. In the dot-com era the technology infrastructure was being built as the internet began to take commercial shape. The costs of developing powerful e-commerce based websites were almost stratospheric and the excesses of marketing even more so. The $300m investment and burning of Pets.com in less than 2 years is so often seen as the poster child for dot-com excesses. Today, core web development structures are so much more sophisticated, and stratospherically cheaper to build. Today’s engineers also have access to a multitude of highly sophisticated toolboxes to develop web-based products. It is easier, quicker and cheaper to get new technology ideas off the paper and into the marketplace. That said, the blockchain piece is expensive — where the number of developers globally increasingly hard to find and the costs of skilled developers are high and rising every day. Proof of concepts, however, are relatively easy to produce and can be blended into recognisable projects that look good.

Easier access to information. Social Media, love it or hate it, has further sped up the information flows. Facebook, Twitter and Linkedin are all examples of how we connect globally far quicker than ever before. Good and bad information can be spread quickly and easily. Before someone clicks, saves and publishes a new article it can be shared around at laser speed. This simply did not happen with the dot-com era.

Portal websites at the time were just beginning to collate market information. The speed at which information was shared was constrained by the technology available to share information flows at the time.

All in all, from the original gold rush through to the dot-com bubble and to ICOs, history does appear to be not only repeating itself, but rhyming excessively with quicker, much faster beats. The speed to develop technology, the speed to develop products, the speed to information access and the easy access to global capital have all conspired together to ramp up the speed of the ICO opportunities exponentially. This has led to the speed of the ICO bubble hyper-inflating.

The cryptocurrency marketplace expanded by 460% in 4 months from May — August 2017. According to Coinmarketcap.com, the value of the cryptocurrency marketplace increased from $36.5bn to $168.3bn in this time.

This growth reflects the new monies that have entered the space, the environment of FOMO, the easy access to global capital and the speed of technology development. It also reflects how easy it would be to implement fraudulent activity. With the blindness of greed, unscrupulous operators are only too willing to take funds from the unsuspecting. With this potential threat, the regulators cannot just sit back and watch major problems unfold exponentially before their eyes. The challenge for regulators is that they are, and always will be, lagging far behind any new technological innovation.

It is hard enough for those of us within the blockchain space professionally to stay up to date with all the developments of the technology. For those within the resource-constrained regulatory authorities, the learning curve is even wider and even harder. Given the rampant speed of market development, regulators not only need to do something, but also need to be seen to do something.

Normally, regulators need to work out what to regulate, and second, how to regulate. This is usually undertaken following calm, reasoned assessment and reasoned decisions. There are signs, however, the regulators are baring their teeth. While the SEC (Securities and Exchange Commission) began with their warning shot across the bows back in early July 2017 followed closely by the MAS (Monetary Authority of Singapore), it was China that led the way — decisively.

The Chinese authorities banned ICOs overnight on September 4. China was the first regime to do so, and it certainly won’t be the last. Indeed, only last week, South Korea banned ICOs and the SEC announced that they have issued charges for the first alleged fraudulent ICO’s. The regulators’ actions are gaining traction. The regulatory landscape for ICOs is at a major cusp, with irrevocable change about to happen.

With the speed at which the ICO market is heading as compared to the dot- com era, I believe we will see high profile ICOs coming under the SEC’s microscope with the increasing vengeance and major actions likely to be taken. With limited funds at their disposal, it will be those that are high profile and those that are blatantly flaunting the rules that will be dealt with first.

Regulation is on its way and at a speed that has no choice but to match the ever-increasing speed of the development of the new technology. The regulators will not have the luxury of time to make decisions. It is easier for them to say `NO!’ and then negotiate than to take their time in making reasoned and see problems materialise.

Whilst regulation ultimately presents a far stronger long-term platform, the final quarter of 2017 will be seen as the time regulators woke up and deflated the bubble before its well and truly pops.