Bitcoin uses increasingly complex computations to “mine” new coins, consuming vast amounts of electricity and server time to create a digital currency people are willing to own.
A Denver-area startup wants to turn the whole equation on its head, taking money raised from a crypto offering to fund oil and gas wells, precious metal mines, clean energy technology and blockchain software development. The revenues those investments generate would in turn support the value of the new cryptocurrency.
“A lot of people are questioning what it is that gives bitcoin its value,” said Alan Forbes, a co-founder and president of Denver-based Global Blockchain Assets. “Bitcoin and ethereum are fiat currencies. There is nothing backing them.”
Earlier this month, GBA launched an initial coin offering of its Xscrip token. The goal is to raise $45 million for its parent company, Blockchain Holdings Inc., so it can invest in a mix of revenue producing assets, primarily those of Independent Energy Partners in Parker.
Forbes is also president and CEO of the company, which has developed a geothermic fuel cell technology it claims can more efficiently generate electricity to power drilling sites and create the massive amounts of steam needed to boost production in oil shale formations.
The company also has production rights on the equivalent of more than 1 billion barrels of oil and gas on privately-held mineral rights in Rio Blanco County. Most of Western Colorado’s petroleum production comes up as natural gas, which has faced a glut and depressed commodity prices since the 2008 crash.
Blockchain Holdings also has rights to purchase an interest in a gold mine in Alaska and has investments in a blockchain application developer called Iperium, Forbes said. Those are designed to provide further diversification for XScrip token holders.
“Is it synergistic, and will it support the increased value of the coin?” is the question that XScrip’s founders have and will continue to ask, said Gary Sumihiro, founder of Sumihiro Investments, a management consulting firm, and executive vice president of global strategic planning at GBA.
Digital currencies have been on a wild ride this year. Bitcoin, which skyrocketed late last year to reach a high of $19,783 in December, now trades for around $6,300. Those kinds of swings make it difficult to use cryptocurrencies as a medium of exchange, much less a store of value.
To address that volatility, some digital currency supporters have proposed tokens backed with gold or other commodities. That might reduce volatility, assuming the gold bullion really is in the vault, but it doesn’t offer much of an upside.
Backers of XScrip want to use the money raised from token sales to buy the the gold mine or mining company rather than the physical gold, the oil and gas production rather than the barrel of oil.
As the investments funded with the coin offering spin off cash, Blockchain Holdings will retain 40 percent to fund future investments and pass 60 percent down to token holders in the form of a dividend, Forbes said.
But rather than adding more tokens, holders will receive an increase in the token value equivalent to the dividend. That “dividend buffering” should defer taxes until the tokens are sold, Forbes said.
Regulators have blocked several initial coin offerings in recent months, arguing they were securities offerings in disguise. GBA fully acknowledges it is offering a security and has filed a Registration D filing for domestic investors and a Registration S filing for foreign investors, Forbes said.
“We had top-level legal guidance. We knew without question we were going to be a security token. We took the time to do all of the work to be fully compliant,” Forbes said.
Investors must be accredited, meaning they have a net worth of $1 million, not counting the value of their homes, or income of $200,000 a year the past two years. GBA is targeting institutional investors, high-net-worth investors and family offices, Forbes said.
After a one-year holding period, token owners should have much greater liquidity than what they would have in a private equity offering. The company will use the Bancor Liquidity Protocol to automatically price XScrip tokens and to instantly convert them into other currencies, with no transaction fees, Forbes said.
Tokens will behave more like common shares in that way. But they will lack some important safeguards available to owners of public companies, such as the ability to vote for directors, a say on executive pay and the ability to ratify takeover offers.
Jillian Sarmo, a spokeswoman for the Colorado Division of Securities, said after a review that it appears GBA is offering the tokens pursuant to the rules laid out for the private placement of securities and has disclosed the risk associated with that type of offering.
“From our point of view, there is currently nothing to indicate that they are in violation of any state or federal securities laws,” she said.
But she added that much uncertainty still surrounds cryptocurrencies and people shouldn’t invest without a full understanding of the risks involved, including the potential for losses.
“Generally, the Division would not recommend investment in an (Initial Coin Offering) unless the investor is able to risk losing his or her entire investment,” she advised.
Collins Brown, co-founder of Market Protocol in Denver, which provides exposure to derivative markets using cryptocurrency, said experimentation with tokens over the past year has exploded.
They can be linked to almost any asset. But traditional investors may be more comfortable holding a currency backed with something they already understand and can put a price tag on.
“Fundamental valuation methods are still being developed for crypto assets, so in the meantime tokens that represent traditional assets will be easier for markets to value efficiently,” he said.