On 14 January 2019 UK listed Coinsilium Group (NEX:COIN) released a Strategic Business Update in which it outlined its plans for 2019 to develop and diversify its investment, advisory, and venture building operations in the fast moving and rapidly maturing blockchain space.
The Strategic Update followed a challenging period in the blockchain industry, which saw Coinsilium’s share price get swept along the broader cryptocurrency sell-off during H2 2018.
In this exclusive interview with Value the Markets, Coinsilium’s Executive Chairman Malcolm Palle looks back over the last year and talks us through the firm’s plans for 2019 and emphasises the management team’s commitment to demonstrating Coinsilium’s commercial potential and help investors to see beyond the ‘noise’ of day to day cryptocurrency price movements.
Supporting Blockchain Since 2014
Coinsilium splits its operations into investment and advisory divisions that share the common goal of supporting early-stage blockchain start-ups.
The firm’s investment arm has been injecting capital into seed-stage blockchain technology ventures since 2014. It aims to support the management of these start-ups before ultimately making a profit upon exiting them at a materially higher valuation. It has already demonstrated its ability in this regard with SatoshiPay, a micropayments platform in which it invested €200,000 in January 2016 and successfully exited just 18 months later when it sold its stake to Blue Star Capital (LSE:BLU) for €725,220 in cash, representing an increase of 362.6% compared to the price originally paid for the shares. Coinsilium also retains 83m BLU warrants which still leaves it with some ‘skin in the game’. Coinsilium’s investee companies span numerous sectors including, but not limited to, financial services, human resources technology, smart contracts and health.
One of Coinsilium’s 2017 investments is Singapore-based Indorse, in which Coinsilium holds a 10pc equity stake. In September 2017, Indorse successfully completed a ‘Token Sale’ for 27,423 Ether (ETH), equivalent to US$9m at the time. These funds are now being deployed in building the business and 15 months later, with its team in Singapore, India and the UK, Indorse is rolling out its decentralised ‘skills’ network for professionals, applying blockchain technology to create a permanent record of its users’ ‘indorsed’ skills and qualifications.
The platform cleverly employs an anonymous consensus of tech experts, who are compensated for their time and efforts with Indorse’s reward tokens (‘IND’). Indorse claims to make validation of skills uniquely simple, objective and trustworthy. And as the professionals on Indorse are also rewarded for their presence and contribution, they also stand to share in the platform’s success. The validation process also gives recruiters absolute confidence that a prospective candidate will possess the skills they claim to have.
Indorse is looking to monetise its platform by offering a low-cost scalable service to the global recruitment industry; a market which is currently worth US$200b and is predicted to reach more than US$ 334.28b by 2025. According to Coinsilium, it has customers in the pipeline for 2019 and is expected to achieve significant revenue growth in the upcoming months.
Coinsilium’s advisory services can be split into two parts. Firstly, the firm is an indirect operator in the ‘seed acceleration’ market. Seed accelerators are designed to help blockchain entrepreneurs transform their conceptual project into a successful start-up.
Rather than operating its own acceleration programme, Coinsilium acquired a 30pc stake in a StartupToken in 2017 for £362,000 via a combination of cash and Coinsilium shares. Registered in Gibraltar, StartupToken is a hyper-accelerator that offers essential services such as legal and technical support, compliance, and economic modelling. It also organises roadshows for its accelerator and advisory clients in Europe and East Asia. In December 2018, StartupToken received an investment from renowned crypto fund Blockwater Capital at a valuation of £2.6m. This latest round implies a valuation of £722,222 for Coinsilium’s stake, representing a healthy 100pc uplift on Coinsilium’s original seed investment just a year earlier.
Elsewhere, Coinsilium advises firms preparing to undertake a Token Generation Event (TGE), also referred to as token sales or Initial Coins Offerings (ICO). In layman’s terms, this is the process of launching cryptographic tokens which may be characterised as Exchange Tokens, Utility Tokens or Security Tokens. Coinsilium supports its advisory clients through the TGE process by reviewing the TGE documentation, providing strategic insights and expert advice and making relevant introductions in the blockchain industry. Up till now, Coinsilium has solely advised firms planning to issue utility tokens, though going forward it intends to expand its services into the emerging Security Token space (more about that later).
As in its investment arm, advisory clients span many different sectors. One example is Bundle Network, which Coinsilium partnered with in March last year. Bundle is a crypto trading platform which aggregates different cryptocurrency exchanges to let people take advantage of the best prices on offer. This allows users to trade across unconnected exchanges and ‘bundle’ different crypto-assets together in one single portfolio. After being appointed as an adviser to Bundle, Coinsilium made a US$125,000 investment into the business whilst Coinsilium’s Chief Executive Eddy Travia was elected to its board.
Dispelling the Myth
Last year saw Coinsilium take significant steps forward across both arms of its business. Indeed, it took on numerous new clients and invested in blockchain-based start-ups and SMEs across a variety of sectors. It also made headway financially in the first half of the year, reporting a 1,262pc increase in turnover to £1.3m in its interim results published in September 2018. Meanwhile, profits for the period increased to £554,605 from a loss of £205,378 in H1 2017.
However, since January 2018, the share price has declined from highs of 10.5p to its current level of around 4p. According to Palle, this decline has come mainly due to diminishing investor sentiment in the crypto related stocks. Over the same period, the price of bitcoin fell from over $19,000 to less than $3,500. Meanwhile, Initial Coin Offerings (ICO) have come under heavy scrutiny from regulators. In response, token offerings and their average proceeds also decreased throughout the year as potential token issuers and buyers became more aware of the likelihood of future regulation in the sector. Many start-ups have now switched away from token sales to focus instead on traditional equity offerings and venture capital funding.
Palle says that Coinsilium witnessed a strong correlation between crypto prices and its share price last year. This came despite the firm focusing on the underlying blockchain technology, which is fundamentally unrelated to cryptocurrency prices. That being said, until recently, much of the firm’s revenues and success fees have been denominated in cryptocurrencies. As such, Palle says it is understandable the market would conflate the two.
In response to this dynamic, Coinsilium released its Strategic Update last month where it laid out its plans to demonstrate its commercial diversity and solidity to the market. The full report can be seen here. Palle is hopeful this can lead its share price to more fairly reflect operational performance and potential in the future:
‘We want to be able to clearly demonstrate how Coinsilium differentiates itself from the pure crypto plays out there,’ he says. ‘We also want to highlight to the market the opportunities we are seeing with the potential to create meaningful long-term value for shareholders. A massive new industry is emerging here and Coinsilium is ideally positioned to play a leading role. As the market starts to recognise this, we expect our share price to start responding to our commercial activities and their potential rather than the day to day fluctuations in cryptocurrency prices.’
One of the significant areas of change announced in the update was to its advisory business. As the hype around utility tokens subsides, the Company is now preparing for a more substantial interest in security token offerings (STOs) or digitised ‘smart’ securities.
Blockchain technology enables tokens to represent financial instruments such as equities. In its latest consultation paper entitled ‘Guidance on Cryptoassets’ the UK FCA has described security tokens as ‘tokens with specific characteristics that mean they meet the definition of a Specified Investment like a share or a debt instrument’. According to Palle, the potential for applying tokenisation to financial instruments is almost limitless!
For example, he tells us that tokenisation could be used to provide certainty around the ownership of every single publicly owned share in a company. The settlement of security tokens could be done in real time, reducing back-office requirements. What’s more, it could also make fundraising more streamlined as digital payments could occur immediately without the need for funds to clear through third party bank accounts.
He said the technology could also be used to simplify certain processes such as General Meeting voting procedures by linking voting rights directly to security tokens. This has the potential to allow investors to take part in General Meeting votes through mobile wallets. Palle even believes the technology could potentially enable round the clock trading:
‘A Blockchain is effectively a ledger and is perfectly suited for the trading and settlement of shares or any other financial instruments on public markets. As many of the large markets such as NYSE parent ICE , Nasdaq and SGX are starting to develop blockchain products and trading/custody solutions, we envisage that it won’t be long before public company shares are transacted on the blockchain. The entire process makes it far more efficient to track and record trades and, although this is just the beginning, it could potentially open the doors for 24/7 trading. You can buy pretty much anything at 11 am on Saturday morning online or if you go to the shops, so why should buying shares in Coinsilium or any other publicly traded company be any different? That is one seismic shift this technology is set to bring about in the world of securities.’
As the graph shows, STOs rose considerably towards the end of last year as the crypto market crashed. However, Palle believes that this is just the beginning of a wave of interest in STOs. He says that Coinsilium possesses the necessary experience and skill-sets to take advantage of this opportunity:
‘Financial markets are yet to take advantage of all the technology out there. But when you apply tokenisation models to the trading of equities and other financial instruments, you start to appreciate how open the industry is for disruption. We have the capabilities to provide a range of solutions in this area, we know the tech and the service providers, and we also understand the markets and how established players function and interact. In short, we have a solid experience with regulated markets, and we see this as a massive opportunity.’
Security tokens are subject to regulation in the same way as traditional equity offerings. The fact that both Palle and Coinsilium CEO, Eddy Travia, boast extensive backgrounds in financial services, positions Coinsilium well on this front. However, the overall regulatory environment is still evolving and not as yet entirely clear.
Many jurisdictions are currently creating new regulatory frameworks to change this. The race is presently being led by Gibraltar, which is set to implement new token regulations in early 2019. As such, Coinsilium plans to considerably increase its presence on the Rock this year, moving much of its core operations to the jurisdiction after Palle himself relocates to the area:
‘Gibraltar is introducing new regulations that give us, alongside some of the start-ups we work with, confidence that the industry in which we operate and its underlying blockchain technology are going to be treated seriously.’
Coinsilium also announced in its update that it plans to develop additional strategic commercial relationships with seed accelerators in South East Asia. Its plan is for third parties like its investee StartupToken to handle the operational management of these programs. Moving forward, it plans to keep building its presence in the region while also expanding to other jurisdictions. Palle told us:
‘Geographically, we think the best area for us at the moment is South East Asia because that is where a lot of the development is currently taking place and the technology is well understood,’
‘Through StartupToken, which plans to launch an accelerator programme in Singapore and later in other parts of Asia, we expect we will have a great presence out there. Asia is one of the fastest growing markets for cryptocurrency trading and blockchain technology adoption and we want to generate meaningful value from these markets.’
All in the Delivery!
It is now down to Coinsilium to deliver on its plans to shift the focus of its advisory and seed accelerator services and demonstrate the quality and potential it sees in its investment portfolio. Obviously, this will take time. However, if the firm is successful and correct in its predictions, then its market valuation should begin to be determined more by fundamental value than conditions in the cryptocurrency markets. The business also has the financial firepower to carry out the changes to boot, having raised £367,000 for growth and development in a Strategic Financing last December.
We will now be keeping an eye on the market’s reaction to Coinsilium’s news flow over the coming months. With plenty of leadership experience and first-mover advantage in an exciting, emerging market, the business has a real chance to deliver some serious value for investors.
Crypto Market Turnaround?
According to this latest Coindesk article a recovery on the crypto markets may be coming soon. This is due to an event colloquially known as the ‘Halving’, where the rewards per mined Bitcoin blocks get cut in half every four years, thereby slowing the creation of new bitcoins.
Bitcoin was designed to be a deflationary currency, with a limit of 21 million that can ever be created through mining. It is estimated that this limit will be reached in the year 2145.
When bitcoin was created in 2008, the algorithm generated 50 new bitcoins as rewards for miners for every block. Since then there have been two halving events, one in 2012 saw the mining reward half to 25 bitcoins and then in 2016 to 12.5. The next halving will be in May 2020 when the rewards will drop from 12.5 bitcoins to 6.25 per block. According to the Coindesk article every halving has been considered a bullish catalyst for bitcoin’s price since it immediately reduces the production and supply for the cryptocurrency.