C&DS @ CRYPTOSUMMIT 2018 - Key Insights
Consulting & Development Strategies’ CEO, Rosario Piazzese, together with head of Crypto and Digital Transformation Dominick Leiweke and their partners from Seed Venture William Pividori and Sergio Prisco, attended the CryptoSummit 2018 event in Zurich organized by Smart Valor.
Among many other topics treated at the Summit, most of the conversation revolved around:
- General trends in the blockchain space
- Security Token Offering (STO)
- Legal frameworks and regulatory landscape
Many prestigious speakers walked the presentation stage at the event chaired by Olga Feldmeier, who personally delivered different speeches.
Hereby we discuss the knowledge bits that stuck with C&DS, hoping they can inspire you to further investigate the aspects you find most interesting.
General trends in the blockchain space
Michael Kasey, explored the reasons for the blockchain bubble that culminated in December 2017’s bitcoin price skyrocketing at around $20.000, making a parallel with other noticeable bubbles, like the ones that occurred when internet, or even electricity were invented.
The positive aspect of such bubbles is that once they explode, new investments culminate in the development of infrastructure which is crucial for growth. For example, after the electricity bubble power grids emerged, with the internet bubble exploding fiber optic cables were laid around the world.
The kind of infrastructure that is emerging from the ICO bubble explosion is of a new kind, but shares similar characteristics with the former ones. Michael Kasey states that we are building a social infrastructure, based on open source code that will pave the transition from the web 2.0, and the internet of information, to the web 3.0 and the internet of value.
This revolution offers us an opportunity to solve the trust issue that interests our current economic system and move from a (de-)centralized model where data, the currency of our age, is largely controlled by certain entities, such as Google, Amazon, Facebook, Apple and so on, towards a distributed model where individuals control and own their information and can capitalize on it.
Michael Kasey closed his presentation with a few recommendations:
- Focus on marketability. Instead of writing up a whitepaper and raising capital to build the product, we should first build a product or prototype, showcase it, gain market traction and then scale with capital
- Welcome enterprise blockchains. Many blockchain experts reject the idea of enterprise blockchains because they inherently lack the beloved trustless characteristics of the technology. However, the work done by enterprises is very valuable, because they represent important test beds and produce relevant research for the wider blockchain space.
- Enable scalability through second layer protocols like “lighting network”.
- Pay attention to regulation and develop standards, as these are the main obstacles to the industry’s development now, but once they are figured out, they will enable the industry to blossom.
- Self-regulation. It’s time for crypto to grow up. We must change our standards of representation and behavior. The “Hodl to the moon” and “get rich on crypto so you can get a Lamborghini” related memes and movements that flood the internet and social networks are ridiculous and paint a the blockchain revolution, which has extreme potential for positive social/economic impact, as a playground of fanatics who’s only goal is to get rich fast without deserving it.
More trends were presented by Daniel Haudenschild who highlighted how:
- The emergence of Asset Backed Tokens has determined the need for Custodians and Vaults which will be a booming market
- Consumer grade technologies in the blockchain space, such as Sony’s Hardware Wallet, will prompt more industry growth
- The role of Self-Sovereign Identity will bestow authority onto the end-users and enable GDPR compliant applications of the technology like building an ID Infrastructure Layer, integrated with specific off-chain solutions
- Second Stage Protocols allow to solve specific blockchain tradeoffs and enable a wealth of innovative solutions and platforms (e.g. plasma and atomic interchain swaps)
Security Token Offering (STO)
Forget about ICO, the 3-letter buzz acronym of 2019 is STO.
STOs are the process of tokenizing, and allowing for trading ownership rights over, physical and financial assets like equity, debt, real estate and so on.
This is Smart Valor’s core business, as Olga Feldmeier explained. She depicted the history of ownership evolving from physically possessing the asset, to creating shared ownership models with shares and to what is happening with the blockchain that allows for fractal ownership of digital assets. In this perspective she said: “The How will define the What”.
Smart Valor is well on its way to enabling such a revolution, which faces its greatest challenges in the regulatory landscape. For instance, the company operates from Switzerland where it obtained the status of Self Regulated Organization, which enables it to operate in this space, with some constraints and obligations and just a week ago moved a step forward in this respect by applying for a banking license in Lichtenstein to enable even more functionalities of the platform.
STOs have the potential to tackle the current financial industry issues in a variety of ways, some also very creative. Charles Hoskinson gave a very interesting speech about how STOs could be used to lift Mongolia out of a sticky situation: Mongolia has a horrible traffic problem, due to the lack of infrastructure (adequate roads, subways and so on). The government is aware of this but fixing the problem would require huge capital investments. On the other hand, Mongolia has huge amounts of precious natural resources which it sells cheaply to neighboring countries like China. A possible solution that Charles is discussing with the Mongolian government is to tokenize big bonds, collateralize the bonds with the natural resources it owns, and use the money to fund the infrastructural work required to jumpstart the economy.
Similarly, Ethiopia has a very promising economy with a rumbling motor of entrepreneurial activity which is hindered by the lack of a stock market. STOs could allow not only for a parallel security market and all the related services to be built on top of it (such as Insurance, Custodianship, Brokerage, and so on), but a way more dynamic and efficient one.
There is a lot going on in this space, backed by incredible amounts of high-quality research being developed all over the world, and in Charles Hoskinson’s words “The Industry’s best days are ahead of it, and STO’s are one of the next big waves”.
Legal frameworks and regulatory landscape
The regulatory landscape remains very fragmented and uncertain across the globe, with a few noticeable exceptions. The main jurisdictions that were discussed at the event are those of Switzerland, USA, Hong Kong, Malta, Singapore and Lichtenstein.
Switzerland begun the crypto-regulation journey at the fore-front with FINMA leading the discussion by classifying, in a document of legal guidelines, ICO tokens in:
- Payment Tokens
- Utility Tokens
- Asset Tokens
Each of these categories of tokens are described and attributed a legal framework, granting a certain degree of certainty around what can and can’t be done and which compliance processes to adopt in certain cases.
However, while Switzerland remains one of the most crypto-friendly environments in the world, it is also true that the process of specifically regulating these and other aspects of blockchain initiatives has lagged behind other countries, such as Lichtenstein for instance.
Another noticeable aspect that was highlighted during the conference is that Switzerland’s legislation is principle-based and in the blockchain space the relevant principles are:
- Technology neutrality: Nothing pro or against blockchain or other DLT’s. Focus on the effects
- Protection of capital market: Private investors and savings have to be adequately safeguarded from high-risk initiatives
- Openness to innovation: The government is open to dialogue with entrepreneurs and investors to build a framework that balances opportunities to be leveraged and threats to be controlled with respect to innovation
One of the most interesting countries to develop blockchain based initiatives is Lichtenstein because it has released the Blockchain Act, a consultation report that addresses the main issues with blockchain-based businesses.
Lichtenstein is also part of the EEA (European Economic Area) and of the EFTA (European Free Trade Association), however it doesn’t use Euro as a local currency, which shields it from some of the European requirements in managing their monetary policy and on the other hand makes it an easy gateway to the European market for blockchain businesses.
Finally, it is a close neighbor of Switzerland and uses the Swiss Franc, which gives it easy access to one of the most important financial districts in the world.
This combination of factors make Lichtenstein an interesting test bed, where entrepreneurs and investors find some degree of certainty for doing blockchain business.
The US is generally known in the blockchain space to not be a favorable environment for developing a blockchain business because federal laws are not addressing the issue and SEC has issued less-than-welcoming statements on this subject.
However, Bob Cornish offered a different and interesting perspective. He argues the USA, and in particular Wyoming, offer good advantages to blockchain businesses because of cheap energy, great engineering skills and state assistance.
He reasons that the digital assets market is too small to become a priority in political debate and is therefore not heavily regulated. He also highlights that the SEC has only prosecuted 10 ICOs since 2014, although other sources report (slightly) different numbers, and he argues that this has to do with the fact that they were ponzy schemes or flat out lies, rather than having to do with cryptos.
In summary his point is that there is no regulatory urgency although many bills are being submitted to council (3 in the last 90 days) to promote blockchain business, so the negative hype is at least exaggerated, and well-intentioned businesses are allowed to thrive in the USA.
The little island has made news headlines with its blockchain friendly policy making and this view was re-iterated at the CryptoSummit.
The 1st of November a new regulation came out that is supposed to bring some certainty in doing blockchain business and leverage Malta’s experience in the space of crypto, which it has been dealing with for 2 years, also participating in the EU’s observatory.
However, Malta’s currency is the euro and bold regulatory moves might find the central bank of Europe reacting to them.
Singapore has already attracted many investments related to blockchain thanks to its pragmatic approach of fitting blockchain issues in existing regulatory frameworks. For instance, there aren’t particular issues with utility token businesses, whereas security tokens fall under existing laws that require certain compliance efforts but are not prohibited.
Hong Kong is another large financial market and was said to be independent from mainland China’s obstructive approach towards cryptocurrencies.
The suggestion I found more interesting during the speech was to set up business in Hong Kong for legal protection and capital and develop the technology in mainland china to access talent and resources to build the product.
The CryptoSummit this year was full of interesting discussions which I believe reflect an industry that is moving slowly, but steadily, towards maturity.
New and impactful application of the technology, coupled with evolutions of friendly regulatory frameworks are likely to enable a new wave of innovative business in the blockchain space, and we’re excited to see where it leads and contribute to making it the powerful industry it has the potential to be.