A brief background first. Digipulse is a Latvian startup that quietly raised c 3,473 ETH in an ICO in October 2017 to build an online digital inheritance service for crypto assets. They publicly launched
a product just over a month ago, making headlines on Forbes and Wired.
But it's worth going through what happened in between and in the lead up to this recent development, as openly summarised by Digipulse CEO in a post where he announced
the new plan, while getting a lot off his chest:
- First he starts off admitting they resolved to selling a token because all other funding options didn't work out. Brownie points for the honesty.
- As a side note, the token was most likely sold as an unregistered security (we are not lawyers, but it promised dividends from a revenue share).
- Throughout the post he shares his frustration about token holders not using the token for its purpose, but only speculating with it. He goes: "out of the 320 sign-ups we’ve had until July 25th, only 2 people have actually allocated tokens to the service".
- Small step back. At the end of Feb they actually announced
the launch of a beta product. The hidden surprise was that they revealed fiat payments would be an option in the live version, a change that would remove the need for the token to access the service.
- Then at the end of May the token got delisted from the only exchange that had decent volumes. It's a security, they said. Drama ensued.
- What now? They decided to remove the dividend from the token in order to please the exchange and get it relisted: "goodbye profit sharing, hello exchanges
", they announced nonchalantly. And it worked like magic: in a tweet from early June the company wished everyone “happy trading”
as they got re-admitted. Bagholders who were promised a dividend were not very happy at this point, understandably.
- But there's more. At the end of June they stopped developing smart contracts for some reasons explained in a rather convoluted post
by its CTO, leading to the departure of an early contributor (with all his tokens obviously, as they were not subject to vesting).
- Then the long awaited launch in early July.
- Which takes us to this week, when they announced their intention to 'detokenize' by offering larger holders the option to convert tokens into the company's shares (subject to KYC/AML) and giving out the product for free to smaller holders (the ultimate literal bagholders). The tokens will remain listed until December, in case holders want to sell at like 75% below
the ICO price (if they find any buyers that is), after that they will be burned.
You've got to give it to them though, they are still here trying to turn it around, honestly explaining what happened and putting their faces to the new plan. Kudos for that, but what an utter mess. Our best guess is they must have realized the regulatory troubles they may have got themselves into and are now thinking they can sweep them under the carpet (presumably they will try to sneak in the T&Cs that by converting to equity one agrees not to litigate?), running the risk of making things even worse for them now. We can only hope they are taking proper legal advice, though if they were they probably would not have been so open about it all...
Digipulse is most definitely not the only case of a centralized company left with a useless and worthless token, sold in a legally questionable way for the only purpose of raising cheap non-dilutive capital. So this may end up inspiring some others in similar situations to give this avenue a shot in the vain hope of product or legal redemption. Those who are still sitting on piles of capital, may even try to buy their tokens back on the cheap or somehow architect a way to return the funds ('equitizying' the tokens and then dividending the remaining cash out to the converted shareholders being one way of doing that). But in reality, many issuers will just cash out what's left, walk away and vanish.
It remains to be seen whether there can be a bright future, or any future for that matter, for companies that go down that route. It just feels like irreparable structural and reputational damage for projects at such an early stage that will still need to hire and retain employees, convince new investors and customers. It's hard enough the normal way.
Now what would be fascinating to see is a decentralized project detokenizing. What Digipulse is doing may lead nowhere but is obviously relatively easy (yet painful) to execute, given it's a centralized entity that is taking all the decisions. But what if a decentralized network somehow came to the collective consensus that the native token was redundant?
How would that even work? Some folks for example have tried to picture the situation where extreme token velocity would cause the network value to crater exposing it to attacks, forcing the network to drop the native token for a reserve crypto currency. This is probably material for a whole separate post.A closing thought.
Despite being only a drop in the ocean, the Digipulse announcement this week may go down in the history books as the moment in time crypto starts waking up from a long hangover asking itself what the hell happened last year. That's the hope at least.