Ferry Biedermann; special to CNBC.com
Friday, 16 Jun 2017 | 7:02 AM ETCNBC.com
A record-setting round of fundraising by Israel-based blockchain startup Bancor has focused international attention on the new and fast-moving technology in the country. Bancor on Monday (June 12) managed to gather around $150 million in what is called an ICO, an Initial Coin Offering, from a range of investors, accredited and non-accredited. It was one of the largest ICOs ever and was completed online in just a few hours.
Blockchain is a distributed and cryptographically secured database method best known for its use in Bitcoin and other more recent cryptocurrencies such as Ethereum's Ether. Bancor, which is still under development, sets out its business model in a 'white paper' on its website. Using its own tokens, it seeks to provide a method to easily switch between different cryptocurrencies, thus addressing the market's liquidity problems. It intends also to allow users to create tokens for use in their own projects, for example for their own ICO.
It's these virtual tokens that Bancor, which is registered in Switzerland, sold off this week to anyone who was interested. In an ICO investors don't get equity in a venture, nor do they lend money, they speculate on the future value of the tokens they buy. Even some of the people close to the startup warn about the uncertain and unregulated nature of such investments.
"There's a lot of hype about ICOs currently. Bancor raised a lot of money, which is nice but it leaves you to wonder whether they actually need all this money and whether the issuing was valuated correctly," says Meni Rosenfeld, chairman of the Israeli Bitcoin Association and a member of the advisory board of Bancor, in a technological capacity.
The Bancor ICO is likely to reverberate both in the blockchain sector in Israel and in the wider venture capital field, which may be encountering its own disruptors.
"I think it's a bit inflated right now, this whole economy of investments in ICOs but even after the dust settles it will still be a new innovative way to raise money, with more and more investors and VC funds looking to get in on the action," said Rosenfeld.
Israeli investor Eden Shochat has invested in Israeli blockchain startup Colu with his VC company Aleph and now has also put money into Bancor's ICO, but only his own, not his company's. He's "not confident at all" that he'll recoup his stake, let alone make a profit, but he likes Bancor's concept.
Shochat calls ICOs "a disruption to the investment industry" and says they have great potential. He expects VC funds to start participating in them but he cautions especially non-accredited investors against the unsettled nature of the mechanism and compares it at the moment to penny stocks. "I don't think ICO's change the basic issue with startups that more than 90 per cent or, it depends how you count, more than 99 per cent of startups fail," he says.
He is enthusiastic about the prospects of the blockchain sector in Israel, saying: "Israeli adoption of Bitcoin and blockchain has been very, very early."
Deloitte Israel has been following blockchain startups in recent years and Amit Harel says Bancor's ICO is bringing new attention. "The blockchain industry in Israel has been showing big potential for a couple of years already but we're coming now to the success stories."
His colleague Hagai Zachor emphasizes that blockchain is much more than only Bitcoin and other cryptocurrencies. "The blockchain technology as a whole gained much interest for things such as supply chain security from many international companies that are now focusing on Israel for the next round."
Blockchain can basically be used to securely tag, track and trace almost any digitalized item. Says Harel: "One of the trends we're seeing is that we used to have mostly blockchain startups but now we see companies that are utilizing blockchain for their business objective… We're seeing it with merchants, goods, diamonds, art, shipments." It is also thought to have potential for use in tracking intellectual property and digital rights, for example in music.
As for the sector's importance to the overall Israeli high-tech industry, he says it has great potential, although a lot of it will be so integrated into other solutions that it will be hard to define it as purely blockchain. "To say that it will have the same percentage as cyber, or automotive or fintech, probably not but as a niche that is driving other industries and is providing out of the box innovation, we think it has in Israel huge potential."
Apart from the obvious cybersecurity-related cryptography aspect that makes blockchain a good fit with Israel's high-tech industry, it also fits with the country's financial technology sector. Roy Keidar, at the Yigal Arnon & Co. law firm in Tel Aviv, has been following blockchain development in Israel for years.
He emphasizes the fintech aspect: "A lot of Israelis work in the fintech industry and they're looking for additional and innovative ways of doing business and getting cash, finding investments, doing crowdfunding, you have a lot of that in Israel."
But security issues and regulation still have to catch up, he says: "There's not enough certainty, which keeps some of the investors away but as usual, the movers and shakers, the early adopters are really into it."