Cryptocurrencies such as Bitcoin and Ethereum have received hyped coverage in the business news. The rise and fall of ICOs have spooked many investors. For want-to-be buyers, it is difficult to distinguish between the currencies and tokens. Will the token emerge from this ruckus as a new asset class?

Three factors have contributed to adoption: growing calls for regulation, the emergence of markets and exchanges, and increased understanding of the ways in which blockchain technology can transform our lives.

Regulation and reassurance go hand in hand

In the initial stages, the crypto landscape was unregulated. Some ICOs were developed and managed fairly, offering legitimate prospects for investors.  More were unlikely to succeed, due to lack of any real tech substance behind the ICO; a few were outright scams, conceived with the intent to defraud.

The first serious steps towards regulation came in July 2017, when the SEC ruled that tokens offered in an ICO were securities, and were thus subject to federal securities laws.[1] This ruling initially seemed ominous, and in recent months, the SEC has been focussing its attention on ICOs that have not followed traditional regulatory guidelines.  Recently, the SEC has made an official distinction between tokens and cryptocurrencies, ruling that the former are securities and the latter are not.[2] The SEC has also weighed in on airdrops, ruling that giving away cryptocurrency tokens is merely an attempt to sidestep securities law.[3]

Other countries have also entered the regulatory fray. In Canada, the CSA has recently issued a notice stating that most ICOs would be considered securities. The CSA is focusing primarily on the structure and purpose of the ICO, rather than the specific nature of the token itself.[4] In Australia, digital currency exchanges are now required to follow regulations aimed at controlling money laundering and preventing cryptocurrencies from being used to finance terrorism.[5] In all these cases, clarification of the regulatory position has encouraged companies to follow regulatory standards for their ICOs, which has in turn attracted higher levels of investment from investors who might otherwise have viewed investments in blockchain as “too risky.”

Blockchain markets look familiar

Investors are also attracted by what they know, and the emergence of cryptocurrency markets and exchanges that are modelled on traditional investment exchanges has done much to bring cryptocurrencies into the mainstream. Towards the end of 2017, the Chicago Mercantile Exchange began trading bitcoin futures, and more recently there have been reports that the NYSE is developing an online trading platform for crypto assets.[6] 2018 has also seen the emergence of blockchain exchanges such as the Gibraltar Blockchain Exchange and the European Blockchain Exchange, which offer regulated environments and protections for investors. Canada’s CoinSmart launched in July 2018 with a mission to “make cryptocurrency accessible.” It’s using a straightforward enrollment process and assets such as a knowledge hub to attract a wide market, including demographics such as female baby boomers, who have thus far been under-represented in the crypto space.[7] Decentralized exchanges such as these, which run on distributed ledger technology, offer several benefits, including easier trading, improved security, and the ability to trade and exchange a wide range of cryptocurrencies.[8]

Growing familiarity drives acceptance

As use cases for blockchain technology are developed and implemented, investors will gain comfort with the idea of blockchain. Governments around the world are implementing blockchain strategies to increase efficiency and improve access to services. In the U.K., for example, the Digital Street research project is gathering data with the end goal of digitizing and automating real estate transactions. And in the U.S., West Virginia recently launched a pilot project to allow absentee military voters to cast their ballots using a blockchain-powered mobile app. As crypto-curious investors see blockchain technology entering the mainstream, their comfort levels will naturally increase.

The final piece of the puzzle is the growing acceptance of cryptocurrency in the financial services industry. Recently, as several of its executives have left for crypto hedge funds and fintech startups, Goldman Sachs has begun moving towards digital assets.[9] Blockchain has also been embraced by private equity groups such as China’s JD Capital, which merges traditional and blockchain investment strategies,[10] and increasingly by blockchain-focussed groups such as XDL Capital, which works primarily with technology startups.

It is important to remember that blockchain is still an emerging technology, and a degree of caution is to be expected, even welcomed. But as investors gain greater understanding about cryptocurrencies, and the blockchain technology that powers them, it is certain that the ranks of investors who are committed to crypto will continue to grow.

 

[1] https://www.sec.gov/news/press-release/2017-131

[2] https://finance.yahoo.com/news/sec-announces-ether-not-security-162658147.html

[3] https://thenextweb.com/hardfork/2018/08/15/securities-sec-airdrops-cryptocurrency/

[4] Posadzki, A. (2018, Jun 12). CSA issues notice on cryptocurrency token offerings. The Globe and Mail.

[5] https://news.bitcoin.com/australian-regulations-cryptocurrency-exchanges-introduced/

[6] https://thecryptocurrencyforums.com/institutional-investors-move-towards-bitcoin/

[7] http://strategyonline.ca/2018/07/19/how-coinsmart-plans-to-reach-the-crypto-curious/

[8] https://www.investinblockchain.com/best-decentralized-exchanges/

[9] https://www.newsbtc.com/2018/04/30/goldman-sachs-executives-moving-cryptocurrency-hedge-funds/

[10] https://bitcoinmagazine.com/articles/chinese-private-equity-group-unites-blockchain-and-investment-strategies/

//]]>