While the world of crypto still very much resembles the digital wild west for big financial firms, there is hope that the cryptocurrency market will “go to the moon” once institutional investors join the ranks of high-net-worth individuals and hedge funds in the space (currently there are over 400).
This could happen sooner rather than later, as a number of self-regulatory advancements are being made that are starting to attract interest from institutional investors. Actions centered on regulatory compliance and adding stability to the volatile crypto market are being performed to demonstrate that the crypto market is becoming ripe for large financial firms.
2018: The Year Of Security Token Offerings
Regulatory uncertainty around ICOs and the crypto market in general have taken center stage since the emergence of initial coin offerings (ICOs) last year. Not surprisingly, utility tokens (user tokens that are not designed as investments, therefore exempting them from federal laws governing securities) have dominated the ICO space. However, in some instances, owners cannot use utility tokens beyond an issuer’s platform. In terms of venture capital, most private assets are relatively illiquid, meaning investors face a difficult and costly time trying to convert these into cash.
Security tokens aim to solve both of these fundamental problems. Unlike utility coins, security tokens digitally represent ownership of assets, meaning they are actual financial securities. Security tokens are backed by assets, profits or revenue of a company, providing liquidity to investors.
Security tokens also add a framework for oversight to regulators. Jay Clayton, chairman of the U.S. Securities and Exchange Commission (SEC), stated on February 6, 2018 that he believes every ICO should be seen as a security. In order to comply with SEC regulations, “Security Token Offerings” (STOs) are being launched and are expected to attract significant amounts of Wall Street capital in the coming months.
Regulatory uncertainty is a major issue for U.S. entrepreneurs seeking to create a token based business. They are forced offshore to pursue their American dream. Ironic as that is, smart founders have worked out how use global domiciles to remain within the law. Utility tokens and Security tokens both suffer from needing to be compliant. However, with Security tokens there is at least a path in the U.S. now by complying with U.S. Securities laws using a Reg D or Reg A exemption, said Keith Teare, Executive Chair at Accelerated Digital Ventures.
The Rise Of Fully Compliant Crypto Exchanges
Fully compliant crypto exchanges are also on the rise. The Intercontinental Exchange (ICE) has announced plans to form a new company called Bakkt to leverage Microsoft cloud solutions to create an open and regulated, global ecosystem for digital assets.
The company is working with a marquee group of organizations including BCG, Microsoft, Starbucks, and others, to create an integrated platform that enables consumers and institutions to buy, sell, store and spend digital assets on a seamless global network. In turn, this will bring a level of trust to previously unregulated markets.
I believe that custody and regulations are holding institutional investors back from investing in the cryptocurrency market. With regulated exchanges like Bakkt, institutional interest in providing custody from Goldman Sachs and Northern Trust, and security token platforms like Harbor, will pave the way for institutional investors to come into the space in the near future, said Paul Veradittakit, Partner at Pantera Capital.
The Role Of Stable Coins
And stable coins are now being used to attract institutional investors to the crypto playing field. The financial tokenization platform, STASIS, recently launched EURS, a stable coin backed by the Euro. The order volume is projected to reach $500 million by the end of this year.
According to STASIS CEO and Founder, Gregory Klumov, one of the most pressing issues for institutional investors wanting to participate in the cryptocurrency marketplace is the volatility of digital currencies. Having a Euro backed stable coin, however, is designed to eliminate volatility associated with cryptocurrency.
Combining all the benefits of digital currencies with the stability, convertibility, and frequent verification of the issuer’s traditional assets, EURS helps users freely move into and out of crypto-economies. European investors now have a reliable counterparty with a transparent balance sheet to get a digital version of EURS. They can then transfer EURS between different digital assets exchanges to transact in the crypto asset of their choice, or invest in any ICO at a fixed price without volatility risk, said Klumov.
The new EURS stable coin joins the dollar-pegged tether (USDT) and is built on Ethereum’s EIP-20 standard. EURS is backed 1-for-1 by the Euro and is currently trading on the London-based DSX exchange and Tokens.net, a new cryptocurrency exchange founded by the co-founder of the major crypto exchange Bitstamp.
‘Bitcoin Moon’ in 2018?
Advancements such as security tokens, regulated exchanges and the rise of stable coins are attracting institutional investors to the crypto market, yet this is just the tip of the iceberg. In fact, these advancements are only scratching the surface of what will likely come in the near future.
Insecurity about yield curve inversion, trade wars and peaking tech stocks all contribute to the global appetite for a new uncorrelated asset class, said Miko Matsumura, General Partner with Gumi Crypto Fund. At the moment institutions have too few ways to gain exposure to this asset class, but the dam will break open with the advent of ETFs and regulated security token exchanges. We will likely see this priced in the second half of 2018.
However, in terms of seeing the rise of a “Bitcoin Moon” take place this year, Teare thinks that this requires more time. I don’t think the Bitcoin moon will be this year. I think we are probably looking at a 5-year horizon for major impact to occur, and there will be spikes up and down during that time period based on individual events. However, the long term will be significantly up and the short-term will likely be spiky on an upward curve. The trading range of Bitcoin will reflect that upward curve.