TAKEN FROM ! TAKEN FROM ! TAKEN FROM ! TAKEN FROM !Lupercal Capital (lupercalcapital.com) is an expert cryptocurrency advisory company. If you’re thinking about an ICO/crypto project, or want to learn more about cryptocurrency, blockchain or ICOs, feel free to contact them at [email protected].
Cryptocurrency— A Recap.
Bitcoin was first proposed as a kind of ‘new money’ — a revolutionary new payment system that could bypass the control of central banks and governments, and avoid reliance on concentrated third-party payment and transaction systems.
But the distributed technology proposed by bitcoin’s pseudonymous founder, Satoshi Nakamoto, had significantly greater application than was first considered. Distributed technology and the blockchain has the potential to reshape a vast array of business models, not unlike the internet did 20 years ago.
After bitcoin’s introduction in 2009, a big increase in public awareness came in 2016 via the DAO. Not only did the DAOultimately introduce the idea of ‘smart contracts’/blockchain integration, but it also demonstrated the possibility of using blockchain technology more broadly; and using cryptocurrency as a platform funding raising — via what became known as Initial Coin Offerings (ICOs).
2017 brought a massive build in momentum for crypto. ICOs are now a new means of raising (often very significant) funding, and blockchain is now arguably the “it” technology of the moment for start-ups.
Where is the industry going?
To work out what the technology is likely to become, we should think about what makes it significant and novel.
In general terms, the technology has two ‘revolutionary’ elements. The first part is obviously the blockchain (see here), while the second part is the ICO funding method (see here).
In our view, the future of the blockchain may differ and deviate from the future of ICOs.
What’s next for the blockchain?
It’s pretty widely accepted that the blockchain will be a key technological change over the next 5–10 years. Adoption of blockchain systems has been talked about by governments, policymakers, central banks, and major finance and tech companies for several years (including extensive research by Lupercal’s experts in an academic and regulatory policy/government context from 2013–2017).
In our view, the likely near term future will essentially entail rolling out this technology to a much wider range of companies and applications (from the Nasdaq to Kodak Coin and beyond). Whilst there are now thousands of ICOs, many of which propose a new, unique use for the blockchain, we’re still largely scratching the surface of potential uses.
The big change will likely be that applying the blockchain technologies find applications across a variety of areas of business and commerce within existing companies, beyond the current concentration predominantly in ICO-funded start-ups. The blockchain technology will increasingly become something that major existing companies start to integrate into their existing businesses over the coming years.
The future of ICOs…
The future of ICOs is much less certain. ICOs are a great new way of capital raising. But ICOs as a capital raising method could be largely killed off by regulation (or at least driven out of major jurisdictions or ‘underground’ — either outcome would reduce much of their commercial attractiveness).
Whether this will happen is unclear. Some governments have seen the potential of ICOs, and have actively sought to promote their country as a host for ICOs. Others have banned ICOs altogether, and many are lukewarm (our database -CryptoRDB- has a detailed breakdown of government/regulator policy towards cryptocurrencies in key jurisdictions).
Reason for Recent Regulatory Policy for ICOs
In some ways, the ICO market/crypto industry is a victim of its own success. Had the crypto industry grown at a steadier pace (ie not the explosive $17bn to $630bn market cap growth in under a year), and been less volatile, governments may have been less fearful of a market bubble, and may have taken a lighter touch (as Western governments largely did from 2013–2016).
Many recent calls for crypto bans and stricter regulatory action (e.g. in South Korea and the US) largely reflect a perceived need to protect unsophisticated or ‘mum and dad’ investors, and control the underlying speculative growth. This political impetus may not have existed had the market grown less rapidly.
The rapid growth means that many governments are more devoting far more time and resources to reviewing their how their laws apply to ICOs, how their regulators can enforce them, and whether legal change is required.
In many ways, the rapid evolution of the crypto industry has made it difficult for governments and regulation to keep pace.
Regulatory Future — Over-regulation
It is possible to design and implement regulatory frameworks for ICOs that would appropriately balance the need for investor/purchaser protection, with the (often limited) resources of a pre-ICO entity to comply with potentially extensive, onerous regulation (like conventional securities rules).
Striking the right balance is extremely difficult and a serious concern for the ICO market should be that, in the struggle to quickly and effectively regulate the industry, governments won’t manage to achieve it. Hurriedly regulating to protect investors is likely to lead to over-regulation. If a balanced outcome can’t be achieved, bans may increasingly be used to ‘hit pause’ on rapid, speculative growth and concerns of illegality.
Outcome of Over-regulation
Over-regulation is likely to:
make smaller, start-up ICOs (with minimal funds for lawyers and compliance) pretty unfeasible to conduct in over-regulated jurisdictions;
(consequently) make ICOs largely the preserve of larger entities, potentially and as sort of IPO-lite, way of capital raising;
push smaller ICOs towards only being able to operate in a — far more limited — number of jurisdictions (which could become oversaturated, and highly competitive).
Add to this the already increasingly competitive ICO market, and a crypto market that looks increasingly likely to face a market correction in the not too distant future.
ICO Future: in short…
The upshot is that there is a real risk that governments won’t get ICO regulation right, which could significantly limit the ability of smaller start-ups to run an ICO.
The counterpoint is that jurisdictions may continue to see the potential of ICOs as outweighing the risks, and may continue to take a lighter touch or may introduce more ICO/crypto-specific regulations that more appropriately strike the right balance (ideally modelled more closely on crowdfunding rules than conventional securities rules).
Arguably, if enough countries take this approach (or a sufficient number of key countries), the ICO market may persist in close to its currently form (albeit becoming ever more competitive, and seeing a growing number of established companies participating). If this happens, eventually, the attraction of potential revenue/GDP, may be for previously unfavourable jurisdictions to eventually review their position.
Importantly, until governments stop feeling they are unable to keep pace with industry developments, we may continue to see the detrimental regulatory announcements that reportedly caused a major crash earlier this week.
At the moment, the regulatory outcome for ICOs is very uncertain. If 2017 was the year that proved the potential to ICOs, 2018 may be the year we discover whether they’re here to stay and, if so, in what form.
