The ongoing government shutdown in the United States could likely have a major impact on future developments in the crypto market. Moreover, this is the longest shutdown by any government in the U.S. which can continue further.
The crypto community is eagerly waiting for the SEC’s decision on VanEck Bitcoin ETF. The SEC has a deadline of February 27 for the approval. However, on Jan. 16, the SEC said that it has put all of its administrative activities on hold until the shutdown concludes.
But despite the U.S. government shutdown, VanEck seems to be unfazed and confident for its ETF application. VanEck believes that it has already laid a robust foundation for the SEC to eventually approve its ETF. In a word with CCN, VanEck’s director of asset strategy, Gabor Gurbacs said:
“I have done everything I can to build the right market structure for Bitcoin and digital assets”.
However, American lawyer Jake Chervinsky made a series of tweets to explain how the shutdown can affect the VanEck Bitcoin ETF approval.
Chervinsky Consider Several Pragmatic Conditions
Jake Cervinsky is an associate at Washington D.C. for international law form Kobre & Kim. He is also well-known within the crypto community for his opinions on how the U.S. Securities laws affect the cryptocurrency market. On Friday, January 18, Chervinsky tweeted:
“The SEC’s final deadline to approve or deny the ETF is February 27. That’s 240 days after the ETF proposal was first published in the Federal Register. The SEC doesn’t have the power to extend the 240-day deadline. The statute absolutely prohibits any further delays. By law, that means if the SEC fails to make a decision by the February 27 deadline, the ETF will be automatically approved.”
However, Chervinsky says that even though the SEC remains out of business beyond February 27, it is “extremely unlikely” that the ETF will be automatically approved. With SEC putting its business on hold, staff members that handle ETF cases from the Division of Trading & Markets, have to stay home.
However, Chervinsky says that SEC has still got a handful of staff members to deal with such cases. These staff members are responsible to take care of “activities necessary for a short period in order to ensure an orderly shutdown of operations.”
7/ What activities are necessary to ensure an orderly shutdown?
The SEC gets to make that designation for itself, and I'm willing to bet it thinks preventing controversial financial products like bitcoin ETFs from being auto-approved due to blown deadlines is "necessary."
However, Chervinsky says that the SEC has already taken necessary action to avoid on missing its Feb 27 deadline. Citing an SEC document that mentions different action from the agency in case of shut down, Chervinsky says “if the shutdown continues to February 27, I think the ETF’s chance of approval is near zero”.
15/ If the SEC won't approve new ETFs, then obviously it must deny them all. And why not? It should be very comfortable with a position like:
"The shutdown prevented us from completing our review, so we can't be sure that the requisite standards for approval have been met."
The much-awaited launch of ICE’s Bakkt platform is around the corner. However, the SEC doesn’t deal with the approval of launching a new trading platform and its the task of the U.S. Commodities and Futures Trading Commission (CFTC). Chervinsky says that the U.S. shutdown won’t have any impact on the CFTC.
He notes that unlike the SEC the CFTC doesn’t have any deadline on approval of Bakkt proposal. “Unlike the SEC, the CFTC has no statutory deadline for making a decision on Bakkt, so it can delay as long as it wants. Don’t expect anything on Bakkt until after the shutdown (maybe months after),” Chervinsky wrote.
Crypto lit up like a Christmas tree a year ago in Dec 2017, everybody got their gifts and more, and joy was in the air. Now the lights are out, snow is thick, and all the wonderful gifts have been returned, except nobody got their money back.
Bitcoin has been cited as the worst investment instrument in 2018, having lost more than 72% of its value in the year. And many tokens that were hot items a year ago, simply ceased to exist. Santa Claus definitely did not come to town, and from the looks of it, won’t be for a while. So we find ourselves asking, “what happened?”
Pundits, analysts, and experts have written many words trying to answer this question, citing lack of adoption, an inevitable bubble, regulations, etc., yet there is a much simpler answer composed of two items: greed and listing.
First, greed of crypto funds, exchanges, projects, and token buyers themselves have hurled the industry headlong into a chasm. The irony is that greed is a good thing, as Mr. Gecko famously pointed out in the movie Wall Street. Greed is the foundation of competition, and is what drives corporations to compete not just for a slice of market share, but for the entire pie.
However greed without regulations always lead to bad things happening, as history shows over and over again. This is why there are rules and regulations, to protect the public and reduce foul play. Yet the crypto industry lies within a vacuum, and that space has been filled with parties all eager to take profit with whatever means necessary.
But crypto has been outside regulatory oversight for many years, why have we seen 2017 and 2018 explode and implode? The second part of the answer lies in unchecked token listing on exchanges. Crypto projects are unique in that their tokens can list on exchanges and trade immediately as liquid assets, without having gone through any review or check.
With no users, revenue statements, product, or even real team members, projects and token buyers are able to induce massive transfers of wealth through conducting ICO’s and then list immediately. It would be unprecedented in any other industry for a company to be traded solely off the strength of its marketing and white paper, yet it has been the norm of the crypto industry.
The lack of accountability or even legality in this process created a fundamentally misaligned incentive structure for all parties involved, funds, projects, exchanges, and retail token buyers. Most crypto funds do not care about a project beyond its speculative value and projects are ill-incentivized to actually develop when they’ve already been paid millions for writing a wishlist.
Exacerbating the issue is that exchanges generate revenue from listing and trading of tokens, meaning they are inherently incentivized to look the other way if a project seems fraudulent. Finally, retail token buyers who do not have any technical background, product building, and business experiences are directly exposed to projects without any guidance of measurement or review.
This has created a dysfunctional cycle that has decimated the industry:
Projects put most of the time and resources into developing and marketing a whitepaper, not an actual product. Marketing team does a good job, and ICO is expected to smoothly. Tokens are sold privately with a heavy discount for “crypto funds.”
ICO is conducted and retail buyers rush in due to the project’s backing by “well-known” crypto funds.
Due to pressure from crypto funds to liquidate, projects rush to list on exchanges.
Project pays exorbitant listing fees, as exchanges are the sole gateway to liquidity
Once listed, everyone dumps to realize gains. Price tanks, whoever is unlucky enough to buy last, is now left holding the bag.
New projects start and the cycle begins again.
Dysfunctional Cycle of Crypto (DCC)
So now that there are no one left to fleece, how do we break the cycle? There are 3 major changes that must happen in order to right the damage done to the industry, and they are not easy:
Stop funding ideas and focus on execution;
Dis-intermediate, not de-centralize.
First, we as an industry, need to stop funding ideas and instead fund execution. It has been reported that over half of ICO’s that started in 2017 failed within the first four months. By now the failure should be well over 90%. And that is normal, as failure is the norm for any new company, blockchain or not. It is easy to write words, but much harder to make anything work.
There is a saying that “an idea is worth 1%, execution is the other 99%.” ICO’s are essentially being funded with millions, and sometimes tens, hundreds of millions based just on their ideas. As a serial entrepreneur, I am now on my fourth startup with Asia Innovations. My first startup struggled and was sold. My second one failed. My third one was sold to Zynga, and my fourth and current one has grown from 0 to close to $200mln in fiat revenue in 5 years.
GIFTO, my token project, was incubated together with Binance in 2017, based on the strength and insights of the existing business. Even after all this, most of the new ideas that came up in my company never go anywhere. There is also a very good reason why traditional venture funding is in stages, and amount of funding is small at the beginning.
Why does a new team of 10 needs $10mln? One time, big ICO’s should go away and instead become a series of smaller fundings, to better accommodate the natural failure rate of doing anything real.
Second, exchanges must be regulated, especially in listing and trading of tokens. Exchanges are not incentivized to be discerning when listing projects since it is profitable to list and money is made simply on trading, whether it is sell or buy. There needs to be regulations that hold them accountable for the projects listed on their platform.
The simple fact is that retail investors need to be protected, and trading needs to regulated. Liquidity availability must be based on actual economic value generated, not speculative. GIFTO has been traded on 16 exchanges. We have seen first hand a wide range of listing and trading management capabilities on exchanges.
Unfortunately, it is natural for human beings to not want rules, until they consistent suffer negative consequences, like those of us who don’t wash hands before you eat and end up with a tummy ache (yes, I’m looking at you). Specifically, two areas must have clear consistent rules:
Trading: non-regulated trading puts all the power in hands of sophisticated traders and firms with large amount of money. Simply put, this is the same as in equity markets, where if unchecked, traders have huge incentives and capability to fleece the retail. This is exactly what happened, and is still happening
Finally, we must accept that “de-centralization” is still a myth and act accordingly. Despite the popular narrative that everything will benefit from “de-centralization”, crypto is the most “centralized” industry I have ever seen. Everyday conversations revolve around twitter comments and actions of a few “crypto influencers”, and a recent fight between two prominent individuals dragged down the whole market.
The most lucrative businesses are centralized exchanges and powerful crypto funds, and we forever are searching for “crypto gods” who can deliver us a new world. Let’s face it, de-centralization is a myth. Dis-intermediation, or reduction of middlemen is the key. It was how Internet and mobile technologies created huge value and entire new industries, and it is what blockchain will do too.
Thus, existing companies and who have an established business, brand and savvy enough to figure out how to use blockchain will herald the next wave of blockchain value creation.
The true pioneers of this concept are likely to come from Asia, where regulations are much friendlier than in the United States. The recent announcement of the Asia Blockchain Accelerator in Taiwan are hints at the direction the industry needs to move in.
The accelerator is officially sanctioned and supported by the Taiwanese government, and accelerates projects that are already delivering real economic value and seeking to enhance their services through blockchain technology. The ABA represents a test case for the future this piece advocates for, one where credible companies tokenize successfully with the right government oversight.
The 3 steps outlined above are not easy. Rebounding from the painful lows of the past year requires focus and willpower that may simply be lacking at this juncture. No good things are ever easy. Only by slowing down the rapid liquidity cycle, can projects, token buyers, and the whole industry refocus on building, not speculating. With the number of smart and resourceful folks still remaining in crypto, it is possible that we will once again hear sleigh bells in the next few years.
“Private investments are happening more than the public rounds” – KEY
A panel of experts was asked about their perspectives on current events affecting the ICO and crypto market. One of the concerns brought up is about the “current winter” and if there is going to be a “spring soon”, referring to the frozen crypto market. Could increasing government regulations overturn public sentiments from lack of engagement (winter) to more of brisk activity (spring)? The question was passed on to me.
I would say that the regulations are very specific to different regions in the crypto space. We’re not doing an ICO in the country we are in, most of the time. We are doing it elsewhere. With that complication, we use the best information available with us, which is usually hard to interpret, and even after you do it all, it keeps changing.
From the ICO’s standpoint, regulation is not helping unless it’s done really well and marketed well.
Let’s look at what is happening in Malta, which I admire. The government is out there saying they are going to help and this is how they are going to do it. Unless there is an explicit clarity in the form of help extended, it does not really benefit people nor attract ICOs. At at the same time, if you look at other countries, there are emerging markets, particularly, in various Asian markets where a lot of progress is happening, not in their governments, but from a business standpoint, for launching ICOs.
As people see that more and more projects are coming out and people are raising funds, even in bear markets, there is still hope and belief that all will be coming back again. Investors are popping out everywhere which is one of the reasons why the private investments are happening more than the public rounds.
When we conduct roadshows in countries like India or Russia, we are able to tap an audience who are not connected online as much as we are. We are very much in the crypto space, we know the terms and know where to go for information and participate. But the investors are not necessarily of the same type, some do not speak English and we need to speak to them in their regional languages, which is the biggest challenge.
If you are looking at the language barrier, it is going to be multifold when we discuss the legal terms, regulatory frameworks, and a lot of daily changes that need catching up.
The ICO and crypto market are growing, opportunities are increasing, and investors are joining in on a daily basis.
Regulation means people are being cautious, but the number of investors are increasing and with that, regulatory questions are going to receive answers much sooner.
Until a few months ago, the ICO (Initial Coin Offering) looked like it would be unstoppable. It had become the go-to means of raising capital for tech entrepreneurs wanting to fund their next venture. In the first quarter of 2018, ICOs had raised more than $6.3 billion from investors, surpassing the total of ICO funding in all of 2017.
However, the US Securities and Exchange Commission (SEC) and other regulatory authorities soon started to intervene. The problem is that when investors buy tokens as part of an ICO, they are often doing so in anticipation of future profits. Furthermore, the investor community around a project usually perceives their token ownership as a stake in the project itself. These dynamics can exist whether or not a project’s founders assert that they retain full ownership of their creation.
This difference in expectations has become a problem for ICOs. US Securities legislation uses the “Howey Test” to establish whether or not a transaction meets the criteria of being an investment contract. The Howey Test questions whether “a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”
While the SEC hasn’t yet introduced any formal legislation around ICOs, SEC Chief Jay Clayton has been unequivocal in his statements that ICOs should be treated as securities. Other regulators, such as the Swiss FINMA, have also established their position on securities offerings.
What is an STO and How is It Different from an ICO?
From this cloud of regulatory uncertainty came the Security Token Offering (STO). Essentially, the STO is an ICO that has dropped any pretense that it isn’t offering securities. Therefore, an STO attempts to comply with securities legislation based on the geographical location of its investor base. STO investors can be assured that they are purchasing equity in the company itself.
Unlike an ICO, an STO sale creates obligations for the issuer of the tokens and gives legal rights to the investor. Unlike an ICO, if the project flops and the company goes into liquidation, the STO investor stands a chance of getting some of their investment back.
Also, while the ICO has been mainly limited to a means of crowdfunding for startups, the possibilities for an STO could mean an established company simply tokenizes its existing equity instruments.
Finally, unlike an ICO, security tokens are not traded on unregulated crypto exchanges, but on compliant trading platforms. Because security tokens are a very new concept, some of these platforms are still in development. Coinbase has announced it will soon be starting security token trading, while NYSE owner ICE is launching a compliant trading platform for digital assets called Bakkt.
Regulatory compliance can impose different requirements on an STO depending on where the tokens are being offered to investors. Now that there are a lot of investors entering the blockchain space—especially in the far-East—many are looking to invest in STOs as they are an emerging trend.
Examples of STOs
There have only been a few instances of STOs so far, again because the process is nascent. Blockchain Capital was one of the earliest pioneers. The company is a venture capital firm and raised $10 million within six hours of opening its STO earlier this year. The proceeds were transferred into one of the firm’s venture funds. Science Blockchain is another example, having raised $12 million for its incubator and fund focused on blockchain investments.
Sia is a blockchain-based cloud storage platform, with an STO that is currently ongoing. The Sia platform operates two coins, the Siafunds coin, which is being sold in the STO. Users of Sia cloud storage will transact in the Siacoin as the utility token of the platform.
Setting Up an STO
To be successful in the STO space requires expertise, particularly so given that the concept is still in its infancy. Launching an STO is a completely different approach and is subject to much more scrutiny than an ICO—especially in terms of legal frameworks and tokenomics, since each token represents a security.
Moreover, regulation is still unclear in many jurisdictions around the world. Therefore, investors and regulators analyze these projects much more rigorously. For this reason, it is critical to partner with the right team of advisors to help navigate the process.
Priority Token is an international STO and ICO advisory agency with offices in London, Singapore, Moscow, and Seoul. They are the #1 STO agency and within the top 3 ICO agencies with significant experience in fundraising for utility and security tokens along with raising venture capital.
Furthermore, Priority Token has a huge investor network in Asia (China, Korea, Japan, Hong Kong, and Singapore) and performs roadshows for their clients almost every month. The company has been involved in projects raising more than $200 million in funding and can provide a full suite of advisory services including competitor benchmarking and direct promotion to private investors.
x10 is a full-service marketing and PR agency covering STO and ICO promotions. The company can provide tailored services including targeted marketing for specific geographies alongside support from writing whitepapers all the way through to exchange listings and post-ICO services. x10 is fast-growing and is rated among the top five ICO marketing firms on Hackernoon.
CrowdfundX is a fintech marketing firm specializing in ensuring US regulatory compliance (Reg A+, Reg D 506 (b) and Reg D 506 (c)) for STOs. The company can also help with acquiring retail and institutional investors.
IBC Group is an international blockchain consulting group spanning 40 countries. The company can facilitate end-to-end ICO and STO support, enterprise blockchain development, capital raising, consulting and institutional training.
In light of recent developments in the blockchain space, there is no doubt that the industry is heading towards an STO-predominated future. While ICOs introduced an excellent means of crowdfunding for startups, STOs are poised to further enhance these fundraising opportunities while introducing new investment dollars into the space —including potentially game-changing institutional contributions.
Despite the recent cost-cutting ventures at ConsenSys, the company is increasing its investment activities by reaching out to independent start-ups. The Brooklyn-based ethereum venture studio announced two new investments on January 17, 2019. They put an undisclosed amount in the encryption-centric browser Tenta and $1 million in the Paris-based Coinhouse.
Kavita Gupta, the managing partner at ConsenSys said that they chose the start-ups since they have bitcoin veterans serving established user-bases. The Coinhouse platform has at least 150,000 user accounts. Moreover, the CEO, Nicolas Louvet, was among the first investors of the hardware wallet startup Ledger.
Éric Larchevêque, Ledger’s CEO reciprocated the move in Coinhouse. Now, both men are board members in each other’s companies. The reciprocated investment is what attracted ConsenSys to the startup with Gupta saying:
“A settlement custody solution like ledger working with the Coinhouse exchange is very relevant to how at ConsenSys Ventures we think about investing”
Tenta comprises an ad blocker, built-in VPN, full data encryption, and Crunchbase lists the browser at over 61,489 downloads. MetaMask, the ConsenSys-incubated wallet startup wants to partner with Tenta to offer built-in crypto wallets within the mobile browser.
Since its inception in 2017 with $50 million, ConsenSys Ventures invests in start-ups that complement those already under the ConsenSys umbrella. Since then, the company has distributed almost $14.5 million across 14 projects. The latest project among them as we reported earlier is Newspack and other equity deals are almost complete.
Gupta’s strategy is to bring as many of the traditional venture capitalists into the ConsenSys sphere as possible. All the entrants are conjoined in an ecosystem that enables every member to benefit from the others symbiotically. She commented:
“We have been helping a lot of VC funds to think through their investment thesis and introduce them to the ecosystem. In a lot of our investment deals lately, we have invited a lot of our friends and other funds who we respect, and they have participated.”
Currently, ConsenSys Venture’s portfolio shares mutual investments with many brands. Some of them are 122 West, Intel Capital, La Famiglia and Paradigm, Coinbase Ventures, Kindred Ventures, General Catalyst, and Sequoia. The Coinhouse $2.8 million Series A was led by Gupta’s team together with several angel investors.
The team is looking for start-ups with over 200 projects expected to apply for the Berlin-based Tachyon program this year. ConsenSys seek start-ups that can raise their own capital and cater to their operations costs without relying on Joe Lubin. That move is consistent with the old ConsenSys strategy that considers portfolio companies as strategic partners.
Going forward Gupta announced that she will prioritize investments in start-ups that focus on privacy, infrastructure, and network effects. Generally, ethereum wants to primarily focus on investments that drive adoption.
On January 12, ErisX announced that Joe Lubin has joined their board of directors. Lubin said that:
“I look forward to bringing my experience with decentralized technologies and digital assets to a model that will further democratize access to digital assets.”
As we reported earlier, the Ethereum co-founder said that the future of crypto is quite bright. He joined ErisX due to its unique position in the market that can help make a likely digital assets’ breakthrough a reality in 2019.