ICOs and the future of smart crypto securities
Aug 29 2018 · by Jonathon Miller
Category: Future Industry
The finance world is changing, and changing fast. Cryptocurrencies have opened the lid on disruptive innovation in the financial sector. Technology, in particular the internet, has claimed some pretty big scalps, but this could be the biggest yet. It won’t necessarily be the whole industry: finance is far more multifaceted than publishing and music - with more moving parts, more players, and much bigger stakes - but nevertheless, the world of finance may be looking down the barrel of the same disruptive forces.
At first, people said bitcoin would be the big disintermediator of fiat currencies - a breaker of banks. Whether this happens or not is yet to unfold, and bitcoin’s capacity to be both a storer of value and a cost-effective medium of exchange still faces a few technical, practical and political challenges. The timeframe for this kind of disruption is a relatively long one. With the rise of Ethereum as both a trailblazer and enabler for Initial Coin Offerings (ICOs), it has become clear that this asset class can challenge the territory of traditional venture capital, investment banking, and stock exchanges.
The rise and diversification of blockchain assets has been incredibly rapid. Market cap of listed cryptocurrencies has grown and diversified significantly from about 25b to over 250b in just 12 months. This growth has been fueled by speculation, and many have cried foul a bubble to end all bubbles. But one of the fundamental drivers is the rise of ICOs. Even though they remain an experiment and radically risky investment, ICOs validate the capacity of cryptocurrency to act as a borderless payment method and sophisticated financial instrument. As a result, the traditional, high-cost VC model is coming apart at the seams.
Here are some high level stats:
Chart provided by Coindesk
USD 5.484B raised in 2017, 14.29B to date in 2018
Equivalent to 45% of IPO listings in Q2 2018
But disrupting VC and investment banking is only the beginning. The regulatory uncertainties around ICOs are quickly being resolved, and among regulators a common view is forming that ICO tokens are securities. This is now a relatively established view of both the SEC and ASIC.
While this may be a useful frame to understand ICOs, it vastly oversimplifies them. The industry has exploded into a landscape of exciting opportunity with cryptocurrency and asset tokenisation. ICOs give birth to what we like to call blockchain assets and the rise of “smart securities.”
Blockchain assets are programmable tokens that can behave like securities (see SEC) that exist on distributed networks and are capable of being transferred P2P or via exchanges. These token offerings are revolutionising the way we think about investment and represent the potential for a whole new asset class, and soon via trustless distributed exchanges globally. This revolution is not just a technical one; the effect ICOs and the tokenisation of securities will have on traditional stock exchanges cannot be underestimated.
Forbes article link
The big stock exchanges have, up until this point, been accepted as mandatory middlemen in the securities space. In relative terms, they are technical dinosaurs; most are aware of it and some have splashed money in attempts to modernise their databases (see ASX and Digital Asset Holdings). But the truth is that the innovation is happening around them and in spite of them. The requirement for centralised clearing houses like that of the ASX or NASDAQ to facilitate exchange has come into question.
If there was a Kodak moment for any players in the finance space as a result of cryptocurrencies, traditional stock exchanges might be the ones to cop it. In ICOs, we see the beginnings of an alternate distributed stock market; it’s still tiny, but could evolve to replace all traditional stock markets entirely. Indeed, why do we need a centralised database of stocks with a government mandated clearing house if stocks exist on a distributed ledger and cryptocurrency clears close to instantly. Distributed Exchange (DEX) infrastructure is the new frontier for experimentation with modular plug-and-play markets (see Ox protocol and Radar network for examples). These market-networks are rolling out and changing the way we think about how marketplaces work. Large centralised locals in which the traditional custody of assets required to novate trades between counterparties will be made redundant.
As such, it might be valid to look at the story of the publishing industry and imagine how that narrative could play out in finance. Perhaps a few big names like the NYSE and LSE will remain, either by virtue of their ability to react quickly enough, or by virtue of human psychology, sentimentally, and brand allegiance, but the rest will be decimated. But where in the publishing space we saw the rise of replacement giants (Facebook, Google), the disruption story in the financial space has the potential to differ significantly.
Blockchain is a trustless distributed ledger and, when paired with distributed exchange protocols, it’s possible to imagine markets without any central hubs for exchanging securities. Just a modular global network; we could see a dismantling of traditional incumbents with no replacement unicorns.
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Category: Future Industry
Nov 07 2018 · by Jonathon Miller
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