December 19, 2018 AtoZ Markets –Although the speculative cryptocurrency market calmed down due to the pressure from the governmental financial regulators, investments in blockchain-based startups continue to grow. During 2018 over 4 billion dollars were invested in such projects. According to the crypto market analysts, instead of going through the initial coin offerings (ICO), more venture capital is now turning to the blockchain startups as the new form of investment.
Funding of the Blockchain Projects Gone Legitimate
A recent crypto market research shows that over 2,000 investors have funded at least one crypto or blockchain company. However, about 75% of ICOs values are lower than their initial capitalization, as the experts stated. The blockchain specialists ensure, that “money for blockchain startups hasn’t gone away,” but going through “more-traditional financing structures”. Regulators fear that the US-based venture capitalists start looking for deals which do not involve crypto speculation such as asset-backed coins and security tokens instead of utility tokens.The blockchain specialists are staying positive about blockchain projects funding, stating, that it has not gone away but just became “legitimate”. After the reforms carried out by the SEC and CFTC, the venture capitalists come into play with large numbers. Most of the blockchain market entrepreneurs in the venture business industry focus solely on startups that provide real products and services based on the crypto and blockchain technologies.
Tokens Are Mostly Equal, But Not All of Them
Through the SEC guidance, VCs now can decide where to invest – utility tokens that aren’t backed by assets, or asset-backed security tokens. According to the cryptocurrency experts, utility tokens are still important for the specific purposes in solving real problems of the financial ecosystem. However, utility tokens do not meet the “Howey Test” requirements established by the Supreme Court. This makes them unsuitable for regulatory purposes as they are not considered as securities. According to the experts, this is because they are only a form of future access to the products and services of a startup and not an asset that can be liquidated. Another important difference as for the security tokens is that utility tokens do not give owners the right to control corporate decisions and only the opportunity to interact with the services of the organization. This means that if the utility token is planned properly, it will not be regulated as security. It does not compete with Bitcoins or Ethereum, as it works in its own environment. At the same time, even without back -up from the significant assets and apart from the basic value of the functionality of the token, its market price may rise sharply due to market demand and retail activity. This is what happened with Bitcoins, Ethereum, etc.
At the same time, security tokens get their values from external assets that can be sold. This feature makes them as an object of the investors’ interest . Security tokens, unlike utility tokens, correspond to the “Howey Test” criterion as true investments, as the investor expects to profit from the efforts of third-party companies in a common enterprise. These kind of tokens can be used for profit sharing, dividend or interest payments, transaction accounting, voting, and management, as well as other functions with blockchain support.
Venture Capitalists Have to Choose Between Utility and Security Tokens
Today, according to the financial analysts’s observations, venture capitalists are at the fork of the blockchain road. They have to choose whether to invest in utility tokens without underlying assets or to focus on coins secured by assets. On the one hand, investors of blockchain platforms under the securities rules may have certain protection and control from the US government. Securities can be stored on state-insured funds and investment accounts. This ensures liquidity for sales when venture capitalists want to withdraw funds in the future, and at the same time reduces their regulatory burden.
On the other hand, venture capitalists who focus on speculative utility tokens can win an investment game just as investors always made profits in fast-growing technology markets – risking their capital on hot startups in the hope of enormous gains.
Trends in the Blockchain Venture Capital
There are 4 trends underway in varying stages of blockchain and crypto investment marketplace development right now:
- Despite the tough SEC policy towards ISO, investment in blockchains is growing, as mentioned earlier.
- Decentralized ledger platforms have a negative impact on the financial ecosystem, but most likely they will not replace the role of venture capitalists and other traditional investors in the early stages.
- It is possible that decentralized companies using ICO’s in their crowdfunding projects most likely will receive the governmental approval very soon.
- Traditional companies use their own tokens for crowdfunding through ICOs. For example, Ripple operating like a traditional inter-bank services company issued its own token (XRP). It uses a shared ledger consensus system to facilitate cross-border settlements and payments.
- New decentralized investment funds are focused on the blockchain investments and its derivatives.
Whenever there is a new area of investment in technology, such as blockchain – sophisticated capitalists invest in the sector, and the early birds get huge profits. Over the time, small investors start to feel that the new market is “too crowded for them and their savings.”
At the same time, unscrupulous traders start selling cryptocurrency to the people who do not need them. As a result investors lose their funds on all sorts of “crypto” transactions, and urge members of Congress to complain about investments in the blockchain. Then the Congress turns to the SEC, and the rest is a normative history. SEC just started worrying about cryptocurrency a year ago. Now the SEC, CFTC and other financial overseers control the quality of the crypto market. This is good for venture capital, because the government pre-checks some bad ICOs, or at least there is a threat of lawsuits against companies that run questionable ICOs.
Even though there are several overlapping trends in blockchain investments, more regulated ICOs will continue to thrive, especially when they use asset-based tokens. At the same time, the role of venture capital is developing after the initial phase of training. In response, venture capitalists began to invest in familiar tokens, as well as in projects that support tokens with assets that could lead to crypto-index funds and other financial products.
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