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Could tokenized securities and institutional platforms win 2019?

As 2018 draws to a close, the crypto community reflects on a year dominated by falling prices, high-profile hacks and the turning of regulations from a theoretical threat into a very real possibility. Combined, these events have put the brakes on the ICO movement and ushered in a new form of fundraising.

After a booming 2017, which saw ICOs outperform venture capital in funding blockchain companies, the ICO investment frenzy reached a crescendo in January, and has been on the wane ever since. As regulators move in, the grey area that ICOs once claimed to operate in has proven to be more black and white than previously imagined: no longer are investors speculating that new laws might be written to govern ICOs, or that "utility tokens" could be exempt from the federal laws that govern securities.

Nowhere to hide for ICOs

Back in February,  SEC chairman Jay Clayton kicked off the year by saying that every ICO he had seen was a security, regardless of the label put on it. This gave a clear warning to those conducting token sales, foreshadowing a year of enforcement which culminated in November with two landmark cases against Paragon and Airfox, and suggested that many token sales had simply been unregistered securities sales.

ico numba
Funds raised from ICOs in 2018 [Source: ICOData]

In this new regulatory landscape, Security Token Offerings — or STOs — claim to offer an honest alternative to the ICO, and one that is in clear compliance with securities law.

Coinbase and Nasdaq, among others, have made plans to support these tokens, which some see as having the potential to act as a bridge between traditional finance and the world of cryptocurrency.

"Tokenized securities are bridging the gap between traditional financial markets and crypto markets because they are aligned with everyone’s interest. Regulators want to protect the investors, investors want their assets tradable, and crowds from all over the world want to invest in the most promising startups at an early stage," said Laimonas Noreika, CEO of STO platform Desico to Forbes.

sto numbers
Number of STOs conducting their main sale [Source: Inwara]

As data from Inwara shows, the number of STOs remains relatively low, but is increasing quickly, aided by "token marketplaces" like Polymath and Desico that aim to facilitate the launching of compliant security tokens.

The promise of ready liquidity, built-in regulatory oversight, and returns ascertained by real economic factors rather than bitcoin’s price, have all helped the movement gain momentum.

But if the security token is to take off in 2019, it will also need to face down an ideological objection — as STOs are effectively private securities offerings, they are only available to accredited investors, and represent the end of the "democratized investment" offered by ICOs.

"Cryptocurrency will Grow Up"

Analysts have long speculated that lack of "regulatory clarity" from the SEC could be the only thing preventing institutional investors from stepping in to the market, suggesting that millions of dollars are waiting on the sidelines.

Tech advisors GP Bullhound — who predicted the crypto boom of 2017 — have released a report titled "Cryptocurrency will Grow Up" that suggests 2019 will be the year when all the obstructions to institutional capital inflow — regulation, custodial issues, and liquidity — will be lifted:

"We are yet to see the best of cryptocurrencies. Blockchain activity is picking up with even traditional financial institutions ensuring they do not get left behind. 2019 should be the year institutional capital flows into cryptocurrency, with previous obstructions and tight regulations lifted."

Supporting this is the development of several more institutional platforms: Bakkt, a fully-regulated custodial crypto platform, is expected to launch in January, followed by a long-awaited decision on the bitcoin ETF in late February, and the release of Nasdaq’s bitcoin futures product — produced in conjunction with the CFTC — at some point in the first quarter of 2019.

All this suggests a rapidly maturing cryptocurrency landscape, and one that is developing closer relationships with the legacy financial system. But, as regulators continue to catch up with the boom of 2017, we could expect enforcement activities to continue unabated, and whether or not this will scare off conservative institutional investors remains to be seen.


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