Professional Capital Sources Scouting for Entry Points in the Blockchain

Between January 2017 and January 2018, Bitcoin’s price rocketed from $800 to nearly $20,000. Over twelve months, we watched the explosion of cryptocurrencies – moving them from the periphery firmly into the mainstream and putting blockchain at the front of the corporate agenda.

When we predicted a crypto bloodbath in our 2018 research report “Token Frenzy – The fuel of the blockchain”, precisely specified as a 90% correction of the overall market with a wipe out of the majority of cryptocurrencies in the course of 2018, we saw the need for a correction at a time of unprecedented global blockchain and crypto euphoria.

The velocity with which the market plummeted and many cryptocurrencies went to zero value after reaching an overall market cap of over $800bn, has nonetheless surprised. Also Initial Coin Offerings (“ICOs”) stalled to centre around fewer projects such as Telegram and EOS.

But we haven’t seen the last of blockchain.Underneath the surface, activity in Distributed Ledger Technology (“DLT”) is in full speed, even within financial institutions.

Clearly, no one wants to take the lead, but given the pace of innovation, there is a thin line between being first and being last. Since many market participants on the financial and strategic side are aware they largely missed benefiting from the digital revolution, we expect they’ll ensure they do not miss out on the blockchain and cryptocurrency revolution.




We predict 2019 will be the year of institutional capital inflow into blockchain, which will not be solely financially motivated, but backed by increasing demand we see on the corporate and family office side and their desire to build positions.

Initially this will happen through funds, equity investing into blockchain technology projects as well as financial instruments and derivative products related to major cryptocurrencies.

But the question remains: what obstructs professional capital inflow?Regulation: The regulator has taken a thoughtful approach on cryptocurrencies of which most are categorized as securities apart from Bitcoin and Ethereum.

Both now officially classified by the SEC as non-securities, with Bitcoin being considered a replacement for sovereign currencies and Ethereum a commodity, like oil or gold – with the rationale mainly linked to their level of decentralization.

The regulatory security, particularly among those two protocols, is expected to be reflected in how capital is allocated in the sector, directly and through derivative products.

Most other ICOs and cryptocurrencies are in fact security offerings and increasingly will need to adhere to regulation and AML/KYC, most of which is troublesome if not impossible ex-post.

There is a massive wave of fully compliant security token offerings (“STOs”) lined up and also the developments around tokenization of assets (“TOAs”) is extensive – both are expected to continue to raise the bar on market standards very fast and hence become a focus area of activity, also because they resemble blockchain equivalents of existing banking products that investors are very familiar with.

Custodianship: The market needs banking-grade custodian solutions of which many promising initiatives are underway. Most of the large volume trades are done over-the-counter (“OTC”) mostly via as yet unregulated intermediaries.

Absorbing the risks in executing these transactions through standardized and audited processes as well as later on the risk of total loss through errors in managing custody will be key comfort to the broader scale of professional investors.

Offerings structured as tokenized financial products are expected to initially absorb substantial volumes and allow avoidance of direct handling of cryptocurrencies.

Liquidity: We have seen an increase in the number of regulated exchanges and large banks getting involved in the cryptocurrency exchange field. There is strong activity in launching index and derivative products as well as Exchange Traded Funds (“ETFs”) for Bitcoin and eventually some major altcoins soon.

Lastly, stablecoins – 1:1 fiat backed tokens – will serve as a haven for investors to deal with liquidity and to manage the still high volatility. More institutionally backed projects will go live soon and contribute to liquidity and hence adoption.

Overall, the correction is ongoing and healthy for the sector to allow the technology to catch up. The main activities we currently see are around building the products and services aimed at reducing the barriers of adoption both on the retail and institutional side.

The capital formation at the exchange and issuance platform level is expected to catalyze near-term consolidation aimed at growing the number of wallets, users and trading volumes. We look forward to an interesting 2019 in DLT and expect another wave of hype – this time more technology and product focused.

Source: CoinMarketCap; cryptofundresearch.com, *A simplified representation

Expert View: Olga Feldmeier, CEO Smart Valor

The past 12 months have seen cryptocurrencies become a mainstay of international headlines and face the ups and downs of fast-moving market trends.

Speculation in the second half of 2017 led to a cryptocurrency boom as buyers searched for quick wins. However, reality kicked in when market opportunities were not immediately as lucrative as some speculators had imagined.

But, like all major technologies, it will take time to find its feet – this is, after all, a marathon and not a sprint. Cryptocurrencies have a fundamental security advantage and therefore have a safe place in our financial world. However, there are still hurdles to mass adoption that need to be removed – and these are not just of a technical nature.

Regulations will need to keep up on all things crypto in order to protect investors and provide more trust in these new asset classes, which is the ultimate prerequisite for broader adoption.

Right now, smaller jurisdictions are moving quickly to stay ahead of the regulatory curve, for example the Swiss Financial Market Supervisory Authority (FINMA) recently announced a new fintech license to support innovative financial companies.

Blockchain, the technology that enables cryptocurrencies to operate, is also backing asset tokenization, which is disrupting how we manage ownership of real assets.

By converting rights in an asset into tokens, transactions can be handled faster, can be done peer-to-peer without the middlemen taking a margin. But most importantly, the minimum investment threshold are much lower, allowing access to asset classes that were out of reach for many.

At SMART VALOR, we are building the first regulated exchange and investment platform for such tokenized assets. We have requests from over 50 projects so far and we get ten requests every week.We’re only seeing the tip of the iceberg at the moment, with more than $1bn-worth of assets tokenized so far.

In H1 2019 I expect this figure to pass $10bn, which is just a tiny fraction of the massive trillion-dollar opportunity that alternative investment methods offer.

Adoption of tokenized assets is occurring most where there is less effort required on the back-end, in terms of complex documentation of ownership and transfer of it. Alternative investments such as private equity funds, venture capital funds as well as tokenized fungible commodities are three areas progressing at pace.

But the biggest challenge remains the regulatory environment, as we are comprehensively leaving the beaten path by pursuing these innovations.

We at SMART VALOR are discussing these topics with the regulatory offices here in Switzerland and Liechtenstein and get strong support for the industry innvoations required for these asset classes, while staying 100% compliant with regulations to protect investors.

As for what investors need to do today: as usual, they have to determine what level of risk they are willing to take – remember these are until now unregulated waters, and they are operating under unclear legal and regulatory conditions for now.

But Financial authorities, for their part, have stepped up their efforts to protect investors and are shutting down uncompliant players in the market.

The crypto market is still in its early stage and so high volatility is to be expected. Over the mid-to-long term, cryptocurrency is a new alternative class of digital financial products that offers many benefits. And there will be offerings that are fully regulated and under a reliable legislation like SMART VALOR.

That’s why I am certain they will find mass adoption – first with progressive, innovative investors, and then others who will follow in their footsteps.

Cryptocurrencies will continue to innovate beyond the well-known bitcoin and Ethereum, and we will see many more coin and payment products emerging. All that will clear the way for mass adoption, which we will see in the second half of 2019.