If 2018 was the year we all realized unregulated cryptocurrency offerings (ICOs) would have to be replaced by regulated “security token” offerings (STOs), 2019 is shaping up to be the year we see that regulation implemented.
As a result of that change, here are 10 events I predict we’ll see in the crypto space within the next 12 months:
1. A large bank will enter into the crypto custody business
The institutions are coming! It’s hard to get through a day on crypto Twitter without someone associating the current price of Bitcoin with the imminent entrance of so-called “institutional money.” It’s hard to imagine the “suits” won’t soon enter the community. The promises of Bitcoin and Ethereum (and their profit-producing volatility and liquidity) attracted professional traders in droves in late 2017 and 2018, and many of them stayed through the latest downturn. With the SEC declaring BTC and ETH as currencies, the path towards institutional custody and trading isn’t far behind. Expect JP Morgan or Goldman to enter the market, with perhaps BoNY joining them. Confidence level: 100%.
2. Several traditional broker-dealers will open ATSs for STO trading
If you have followed the crypto sector for any amount of time, you are probably familiar with OFN, aka The Open Finance Network, a recently licensed regulated alternative trading system. In the U.S. and Canada, an ATS is a non-exchange trading venue that matches buyers and sellers to find counterparties for transactions. They are usually regulated as broker-dealers instead of as exchanges (note: my company’s General Counsel and cofounder, Gautam Gujral, was an author on the SEC’s first Concept Release on ATS and Exchange regulations). OFN is just the first of these businesses that will be popping up. Recently, Coinbase purchased a broker-dealer, as did token issuance platform Tokensoft. In 2019, we can expect more broker-dealers (perhaps firms such as Entoro Capital, US Capital Global, or SeriesOne) to obtain licenses to trade in alternative investments like security tokens. Confidence level: 100%.
3. 2017 ICOs issued in the U.S. will be the first security tokens traded on exchanges
With year-long restrictions, small-ish raises, and tiny floats, don’t expect many of the 2018 STOs you’ve heard about to trade on exchanges (some have fewer than five holders and asset values in the low single digits). Instead, expect “remediated” ICOs that have registered their shares with the SEC to be the first issuers to trade in volume on compliant exchanges. There really is a Santa Claus for the security token exchanges, and his name is SEC Chairman Jay Clayton. In 2018 he put some presents under the tree in the form of Airfox and Paragon Coin, both ICOs that received “orders” from the SEC forcing them to register. In other words, the first widely traded STOs will have started life as ICOs. Hear me now, believe me later. Confidence level: 99%.
4. Asian investors and funds will pivot to the US to invest in digital assets
Asian investors are still dominant in traditional Bitcoin (mining) and ICO-driven crypto activity, but over the course of the last six months, as prices have dropped and new technologies (like digital asset tokenization) have come to the market, investor groups such as Huobi and Binance, and newer VCs like 8 Decimal, Alpha Omega Capital, Aurablock Capital, and Alpha Square Group are inverting the market and coming to the U.S. for its regulatory clarity. With the Chinese government saying that STOs will be kicked out, Chinese investment teams have been especially active in the U.S.-based STO community, seeking to learn how to structure these offerings. This is exciting; the U.S. may in fact be a bastion of innovation in at least one realm of crypto — the kind that Wall Street and big investors prefer. Confidence level: 95%.
5. The SEC will approve several Reg A+ deals related to tokens
The JOBS Act Reg A+ exemption, for those who don’t remember, allows unaccredited investors to fund startups. Ignored in the heyday of the ICO, Reg A+ is now considered a holy grail by those in crypto who oppose the idea of accredited investor requirements but still believe in playing by the SEC’s rulebook. Reg A+ lets a company raise up to $50 million annually via non-restrictive crowd fundraising, enabling a form of ICO that’s legal in the U.S.
When Circle acquired SeedInvest in Q4 2019, it laid the groundwork for some successful 2019 Reg A’s. Expect the SEC to approve several Reg A+ issuances this year with an underlying token, from firms like Issuance.com and SeedInvest. Confidence level: 90%.
6. ‘Legacy’ financial institutions will become digital asset infrastructure buyers
Once crypto tokens cross the chasm and the so-called early-majority starts to form (in mid-to-late 2019), expect to see some significant M&A activity within the ecosystem. Coinbase’s hiring of former LinkedIn M&A boss Emilie Choi, is a good indicator. While it’s tempting to expect large and early crypto infrastructure ventures like Coinbase (and Circle, Huobi, Binance, Cumberland-DRW, etc.) to be the primary drivers of this activity, some believe we will see the Nasdaq, NYSE, EuroNext, JPX, or even more likely DTCC or Cede and Co., come in as acquirers. What could prevent this from happening? Not enough data/signal to create institutional FOMO, where fear of insurgent innovation drives M&A. Confidence level: 90%.
7. Ethereum will lose ground as the predominant platform for the next generation of coin offerings
Ethereum’s ERC-20 smart contract standard is the undisputed coin of the ICO realm, with more than 1,000 unique ERC-20 crypto tokens issued since Ethereum debuted in 2015. Despite its overwhelming popularity with ICOs, widespread exchange compatibility, and developers’ familiarity with Solidity (the programming language for Ethereum-based smart contracts), Ethereum’s time as the predominant platform may be coming to an end. Faster and cheaper smart contract platforms like NEO, Stellar, IBM’s Hyperledger Fabric, and Hedera Hashgraph are coming along to steal the limelight just as the world starts paying attention to SEC-compliant token offerings. Also not helping Ethereum is the Constantinople hard fork coming up later this month, which could damage the community supporting the chain. While there are many reasons to move from Ethereum, the concentration of developer expertise and the standardization efforts of security token issuance projects like Polymath, Harbor, and Securrency will keep Ethereum in the lead for 2019. Confidence level: 70%.
8. Regional authorities will increasingly match U.S. crypto policies and may surpass the U.S. in STO activity
As more ICO projects launched outside of the U.S. fail (shut down, etc.) and more issuers wrap their offerings in safe-seeming nomenclature (i.e. calling any offering an STO, regardless of how it is structured), expect foreign regulators to adopt frameworks similar to what the SEC has established in the U.S. Exhibit A: Malta. While Malta has been attracting projects seeking to raise capital, it suffers from a poor reputation among banking regulators. In order for Malta to attain its goal of becoming “Blockchain Island,” it will need to pass and maintain stricter KYC & AML rules so depositors in its banks (i.e. crypto projects) can be confident they can use the funds to pay developers and vendors who are not on the island. Malta is not alone in its attempts to normalize and provide investor protections. Singapore recently stepped up efforts and may be the real pioneer in trading tokens on regulated exchanges. Confidence level: 60%.
9. Tokens will be traded on ‘major’ exchanges in addition to new broker-dealer operated Automated Trading Systems
This might be the easiest prediction, because an insider made news of it at December’s Consensus: Invest. According to Gabor Gurbacs of Nasdaq partner Van Eck, the Nasdaq plans on launching Bitcoin futures trading in Q1 2019. But before you say this is a safe prediction, remember what Bakkt said about ICE-Bakkt in August. There is no such thing as a “gimme putt” in crypto, and yes, tokens will also trade on tZero and Open Finance. Confidence level: 50%.
10. Rules related to accredited investor requirements will be relaxed
Accredited investor rules are what separate ICOs from STOs. They dampen excitement and enthusiasm among fans of so-called “open finance.” With these rules in place, only the wealthy are able to participate in current STOs. Spice VC, which recently began trading on OpenFinance, is an example of an offering that might be interesting to more investors, but is only available to those with a $200k annual income or more than $1 million in assets. The market will struggle to foment revolution in capital formation and liquidity as long as most of the potential investor pool is excluded from investing. However, in the harsh light of the ICO hangover, changes to accreditation rules have little chance of a quick modification. Confidence level: 1%.