Events - 29.11.2019 - 00:00 

Financing start-ups with cryptocurrency

There are various options for financing start-ups. One of these is cryptocurrencies. At the ACA Symposium, Simon Morgenthaler from Swissquote explained how this works, the meaning of smart contracts and ICOs, the opportunities arising from blockchain and where the dangers lie.

29 November 2019. For start-ups, it isn’t always easy to get enough initial capital to finance their new business idea, explained Simon Morgenthaler at the beginning of his presentation. Launching a company on the stock exchange is a very expensive process, he explained, and is virtually out of the question for start-ups. In this environment, he said, crowdfunding represents an alternative, which can also be based on blockchain and cryptocurrencies.

A complex system of opportunities and risks

Anyone who hasn’t studied blockchain and cryptocurrencies will not have an easy time of understanding the system, Simon Morgenthaler emphasized. He therefore began by explaining the different concepts of blockchain, Bitcoin, smart contracts and initial coin offerings. The major advantage of blockchain technologies in dealing with cryptocurrencies, he said, is that there is always a database in the background on which all transactions are stored.

“Every exchange is transparent for everybody within the blockchain. It’s not possible to change or modify the data or to lose it.” If anybody attempts to change data on the computer, he continued, it will first ask all the other computers in the blockchain, and they will then reject the request. The whole thing is therefore a very secure IT system.

Lack of state supervision

It’s very important to know, however, that cryptocurrencies are separate from the conventional banking system, Simon Morgenthaler explained, noting that the banking crisis and growing discontent with the traditional banking system has helped cryptocurrencies and blockchain technologies gain increasing numbers of fans. “There are now more than 4,000 cryptocurrencies, with Bitcoin the best known,” he said.

The speaker then talked in detail about smart contracts and initial coin offerings, explaining how the smart contracts based on computer protocols are digital contracts, so to speak, which build on the blockchain technology. They are similar, he said, to conventional contracts in the way they are concluded for purchasing a car or starting a new job, for example. “But they cost less money and work more efficiently. Sources of human error are also virtually excluded.”

Perhaps the best known blockchain platform offering smart contracts is Ethereum, Morgenthaler said, citing examples for the application of smart contracts as car sharing or leasing, credit transactions or claims processing for insurance and real estate transactions, smart home, digital identity or initial coin offerings (ICOs).

Unregulated methods of crowdfunding

Initial coin offerings, the speaker explained, are an unregulated method of crowdfunding, which is used by companies whose business model is based on cryptocurrencies. “Using this method of initial capital acquisition, cryptocurrency companies avoid the strictly regulated process of raising capital, which is dictated by venture capitalists, banks or stock exchanges.” In an initial coin offering, he continued, part of a newly issued cryptocurrency is sold to investors in exchange for currencies issued by the state or cryptocurrencies, but primarily Ethereum.

Simon Morgenthaler made no secret of the fact that there is a major risk of fraud with initial coin offerings. It’s therefore important to study the relevant white paper precisely. Anyone who examines the business idea carefully, reviews the team and studies the roadmap, however, will be able to recognise whether this is a serious ICO or a case of fraud.

The Institute of Accounting, Control and Auditing at the University of St.Gallen organised its annual ACA Symposium for what is now the third time on 28 November. It was attended by around 100 people from the areas of accounting, controlling, auditing and corporate finance.

Image: Pixabay / 3D Animation Production Company

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