▲ Fintech Series

By: Dalibor Cerny, Finance Lawyer, Crypto Enthusiast
Gabriel Dusil, Co-founder & Board Member, Adel

Abstract

Financial Technology (Fintech) is one of the fastest developing industries of our time. This article is the first in a series of two articles that explore the dynamics of financing startups and new entrepreneurships, especially in the fintech sector. New company structures are emerging with very innovative features. Recent examples, along with their innovative investment structures, are reflected in startup funding campaigns that use a technology called blockchain.

A new enterprise called Adel is a refreshing example of how blockchain is being combined with traditional venture capital seed funding while exposing the challenges and controversial topics apparent in the fintech evolution.
In part two of this series, “The Next Evolution in Funding Innovation” we will discuss funding and organizational structures of new digital companies and blockchain ventures.

The DAO

Before getting to fintech challenges, let’s begin with a bit of history. Nearly a year ago, the first major decentralized autonomous organization (DAO), called simply The DAO , was launched on the Ethereum blockchain platform. Excitement was so high it created the biggest crowdfunding campaign of all time, raising over USD 150 million (Figure 1). The idea behind The DAO and recent successors was to create a decentralized organization using a tool called smart contracts. These allow for automatic governance and day-to-day decision making using computer code without having traditional human intervention and classical corporate structures in place.

Figure 1: ICOs, Crowd Funds Raised, since 2012

The DAO wanted to offer complete transparency, total stakeholder control, unprecedented flexibility, and autonomous governance. Power would reside in the hands of its stakeholders. These stakeholders would also establish the general direction and mission of the organization and would be democratically voted to reach a consensus on important decisions. In this lies the element of decentralization - there is no central body or authority to exercise the decision making throughout the life of the organization. In theory, this should operate more efficiently than a normal company due to the lack of corporate hierarchy, politics, and bureaucracy, creating obstacles and delays. From this seemingly straightforward setup comes the benefit of lower operational costs and little room for corruption.

However, The DAO is already a chapter in the history of blockchain. This ambitious project met its demise almost immediately after its initial coin offering (ICO) when over USD 50 million disappeared from The DAO’s funds. The eventual fallout caused, among other things, a split of the second most popular cryptocurrency token called Ether. This was caused by a successful hack of The DAO exploiting a weakness in their code.

Although The DAO ended up in scandal and disappointment, the fintech community definitely didn’t give up on decentralized organizations. Quite the contrary, new projects soon emerged. A number of blockchain incubators came onto the scene throughout 2016 (Figure 1). One notable project, Adel, was announced in December 2016 on this very idea of a decentralized ecosystem with a global reach, centred around an active social networking of its members. In fact, Adel was in development for five months when The DAO’s funding began. Their project will commence funding on May 1st 2017, using the same vehicle as The DAO called an initial coin offering (ICO). The ICO’s purpose is to purchase their Adelphoi (ADL) coin (a cryptocurrency token), which will be used to make transactions within the community. In the future, when their fund vehicle is established, ADL will be used to purchase equity in blockchain projects.

Taking the Right Path

Adel is a platform whose main goal is to develop solutions for implementing blockchain - the heavily discussed technology behind bitcoin. It must be emphasized that there are many use cases exploring the possibility of blockchain, but most of them have not made it past the proof of concept (PoC) stage. Nevertheless, there are indications that the next five years will lay the groundwork for the implementation of this technology across various vertical industries. Blockchain projects will eventually move from PoC to production and cutting-edge solutions will prove their usefulness.

Still, the idea of a blockchain incubator is not really the most interesting aspect of Adel. What is most intriguing about Adel is that it shows the potential of the next evolution in how companies may be structured. Adel is potentially a window into the future of how organizations will evolve from the perspective of funding, corporate governance, collaboration, and the meaning behind their existence. When The DAO imploded, many questions arose about the legality of their funding because the process happened in a completely unregulated arena. While startups and governments around the globe are trying to figure out the basic rules of crowdfunding, the crypto community is already funding its new ventures through cryptocurrency tokens. It is clear that regulators have not kept pace with developments in fintech and digital currencies.

What is prudent with Adel is that they do not try to appear overly “disruptive”. In fintech, this word has symbolized the destruction of established players with up-and-comers. However, these new players rarely end up replacing existing solutions. What typically happens is a fusion of the old with the new. So disruption is sensitively positioned by Adel as an opportunity, rather than a threat. As in nature itself, fintech must also evolve. It is important to continually innovate and implement new technologies, but what’s more important is to ensure that solutions can be integrated into the fabric of an institution’s political, economic, social and technological infrastructure. The core message is not to disrupt, but to improve efficiency and lower costs. In other words, even if disruption is inevitable, it is not the main goal.

Technology seems to evolve with a natural cadence. But from an enterprise perspective, systems are not positioned for aggressive leaps forward. We cannot expect companies to abandon their traditional ways and jump into self-governing DAO-like organizations where funds are unregulated. There is also the human aspect to changes in technology, whereby many managers see new technologies like blockchain as a threat to their corporate existence. They will fight to keep any disruptive technology out of their company for fear of losing their title or position. Finally, there is the cultural aspect. Implementing new technology requires a review of a company’s culture to determine the propensity to change by the staff, and how attempting to implement a new solution may affect the outcome.

We agree that old systems may be slow, inflexible, or out of date. But their biggest advantage is reliability. The 150-year-old electrical grid at 220V 50Hz/120V 60Hz might be completely redesigned if it were rethought with today’s requirements. Same goes for the Internet – TCP/IP is well known to be an inefficient protocol, but it works! Incumbent systems have gone through long periods of stress testing and tweaking. The upheaval of legal regulation in banking and traditional financing is a testament to the industry’s wiliness to evolve. It can be argued that we already live in over-regulation and tight governmental control. But that does not change the fact that legacy infrastructures have been tried and tested for decades and are backed by the most powerful entities on the planet: state governments.

Human nature is about improving and progressing. We should not forget that just a few years ago, Airbnb or Kickstarter didn’t exist. Now they are household words. The same vantage point can be given to blockchain, except we are many years ahead of this technology from being woven into our daily lives. Adel´s approach lies in the fact that they utilize the best from both worlds – the old and the new.

About the Authors

Dalibor Cerny

Dalibor is an (alternative) finance lawyer, crypto enthusiast and Vipassana meditation practitioner. He has roots in Prague, Czech Republic, where he obtained his PhD. in Private International Law and International Trade Law. He also studied Master of Law (LL.M) in San Francisco, California and International exchange program at Bucerius Law School in Hamburg, Germany. In his professional life, Dalibor is focusing on banking, finance (including alternative finance, crowdfunding, cryptocurrencies and fintech), capital markets, insurance, reinsurance and international trade law. He worked as an attorney and in-house legal counsel for global financial institutions such as AXA and European Investment Bank.

Gabriel Dusil

Gabriel is a seasoned sales and marketing expert with over twenty years of experience in senior level positions at companies such as Motorola, VeriSign (part of Symantec), and SecureWorks (part of Dell). His strengths lie in international business development and strategic partnerships, as well as the unique ability to translate complex ideas and technologies into language that decision makers can easily understand. Gabriel has a Bachelor’s degree in Engineering Physics from McMaster University in Canada and possesses expert knowledge in cloud computing, IT security, and video streaming technologies (Over the Top Content, OTT). Gabriel also runs his own company, Euro Tech Startups s.r.o., and manages two blogs: https://dusil.com/ and https://gabrieldusil.com .

References

This article targets a broad audience without getting too deep into technical, economical or legal jargon. The reason for this approach is to explain the latest activities in fintech in the most accessible way possible, without getting lost in all the technicalities. The authors assume that the general public struggles to keep pace with technical, legal and social media developments and that it is challenging for individuals to orient themselves in the jungle of media overload, fake news, scams and annoying trolls.

A very basic visual introduction to the concepts behind a blockchain:

https://www.adelphoi.io/
https://en.wikipedia.org/wiki/Decentralized_autonomous_organization
http://www.investopedia.com/articles/insights/051616/why-dao-ethereum-revolutionary.asp
https://www.ethereum.org/

What is crowdfunding?
https://www.fundable.com/learn/resources/guides/crowdfunding-guide/what-is-crowdfunding
https://en.wikipedia.org/wiki/List_of_highest_funded_crowdfunding_projects

For example SuperDAO:
http://www.superdao.io/#Superdao-nav

A beginner’s guide to smart contracts:
https://blockgeeks.com/guides/smart-contracts/
https://en.wikipedia.org/wiki/List_of_highest_funded_crowdfunding_projects
http://www.investopedia.com/terms/i/initial-coin-offering-ico.asp

A gentle introduction to digital tokens:
https://bitsonblocks.net/2015/09/28/a-gentle-introduction-to-digital-tokens/
http://www.coindesk.com/ethereum-classic-explained-blockchain/
http://www.coindesk.com/understanding-dao-hack-journalists/
https://letstalkpayments.com/11-blockchain-focused-startup-incubators-as-unconventional-as-the-technology-2/
http://www.livebitcoinnews.com/cryptocurrency-icos-remain-gray-area-legality-concerned/

For example EC on identifying market and regulatory obstacles to crowdfunding in the EU:
https://ec.europa.eu/info/tender/identifying-market-and-regulatory-obstacles-cross-border-development-crowdfunding-eu_en

or approval of crowdfunding legislation in Australia:
https://www.crowdfundinsider.com/2017/03/97541-fintech-australia-welcomes-approval-crowdfunding-legislation/

What disruption really means:
https://www.tonyrobbins.com/career-business/what-disruption-really-means/

Example of such:
http://spectrum.ieee.org/tech-talk/computing/networks/enterprise-ethereum-alliance-launches

More on this thought:
https://techcrunch.com/2016/05/16/the-tao-of-the-dao-or-how-the-autonomous-corporation-is-already-here/