It seems hard to believe, especially after a decade where it dominated new finance, but equity crowdfunding is still just in its infancy. Originally coined by entrepreneur Michael Sullivan in 2006, the true modern crowdfunding boom kicked off at the start of the previous decade with the launch of platforms like Kickstarter and Indiegogo, and then the subsequent signing of the JOBS Act in the United States in 2012. Eventually, the first form of crowdfunding matured into variables like equity crowdfunding and crowdlending, where the Europeans for a long time had an edge over their U.S. counterparts.
In what seemed like an overnight transformation at the time, crowdfunding changed whole product verticals and industries in only a matter of hours, evidenced by the launch of such products as the Oculus Rift (eventually bought by Facebook for $2 billion) and Pebble smartwatch. GoFundMe, which launched shortly after Kickstarter and Indiegogo, allowed people to make themselves a sort of product by crowdfunding personal donations.
Equity crowdfunding still has many more years ahead of it than behind it, but with that comes a number of obstacles still to overcome. While crowdfunding might have initially disrupted venture capital funding, there are still challenges to consider before we can say that the world of finance has become completely decentralized. Undoubtedly, a new and better-decentralized crowdfunding will need to reflect what has also been happening throughout crypto markets in the intervening years.
Circumnavigating the literal world of finance
For crowdfunding to meet its true potential, there is first the literal world of finance with which to contend. Not every country has its own JOBS Act, let alone open policies toward relatively new concepts like crypto and decentralized finance. In some countries, you still need to visit a local notary even if you have signed up in a global equity crowdfunding campaign. In addition, some countries don’t allow a “share price,” moving an asset’s price from its original “value,” hindering or outright outlawing the ability to tokenize assets.
As interest in crypto begins to peak with the explosive growth of DeFi and NFTs, it remains to be seen whether this will spur jurisdictions to loosen regulations based on this enthusiasm or to tighten them based on the inevitable fraud that usually trails a financial bubble.
Three years ago, we saw what should have been the next wave of crypto-led venture funding led by the Initial Coin Offering (ICO), but that market collapsed after a number of high-profile fraudulent offerings and Bitcoin’s significant price drop in early 2018. It was just one more fright for governments that already tended to err on the side of regulation instead of innovation.
Beyond the challenges posed by countries that feel compelled to impose their own brand of centralization upon decentralization, crowdfunding is still struggling to emerge from the old system, entrenched in such formalities as “shareholders.” Just as governments are still slowly assessing whether the modern tools of financial empowerment are friend or foe, the financial community itself has to square how much power they want to cede to “the wisdom of the crowd,” especially after the fault lines between institutional elite and retail finance armies were exposed during the recent Reddit-driven GameStop short squeeze. For many other old and stable bastions, this dynamic too is about to radically change.
Warming cold feet in an inevitable marriage
The major advantage presented by crypto in the last several years that should be realized by all parties – small investors, major institutional investors, and nation-states alike – is liquidity, true globality, and transaction speed. The democratization of liquidity and the almost overnight breaking down of the walls that separated most from financial access have driven the total locked value in DeFi to north of $40 billion. No longer does finance have to follow the rules or hours of the banker.
However, DeFi still presents only a very nascent stage for the future of finance, primarily utilizing token liquidity pools and yield farming to rebuild traditional peer-to-peer lending. Peer-to-peer lending is just one small corner of the financial universe, but this is where the real fun starts, because while crowdfunding changes the world of traditional finance, the blockchain and crypto solutions entirely bypass banks and slow-moving transaction models, while offering better stability, transparency, and participation.
The next step is to re-invent ICOs into a better crowdfunding mechanism – to “build back better,” if you will. ICOs were snakebit by bad timing and bad actors a few years ago, but perhaps the recent success demonstrated by DeFi and NFTs, along with Bitcoin ascending yet again, provides a stable and innovative enough foundation to build that bridge between the opening up of crowdfunding in the last decade and the token boom being experienced in this decade. We can and will learn from the mistakes of the first wave, while building on the success of these latter crypto initiatives that have restarted the cycle of tokenization through baby steps. I wouldn’t be surprised if a group of entrepreneurs right now are creating the prototypes for crowdfunding 3,0 merged with blockchain and crypto.
What both governments and institutional finance will soon realize if they haven’t already is that the arc of the financial universe will continue to bend toward this progress. Rather than change to be feared, this will present unprecedented new opportunities for both financial experts and government revenue, if they are bold enough to believe it and offer the resources necessary to support it. Hopefully, they’ve also learned from their own mistakes in previous cycles too.
Daniel Daboczy is the CEO of Technicorum Holdings, the company behind the DeFi and NFT project KingSwap. As a longtime leader in the crowdfunding sector, he previously co-founded and led FundedByMe, one of Europe’s largest crowdfunding sites.