Regulating Crypto-assets for the Finance Market of Tomorrow
24 November, 2019.
The free market, non-central bank monetary instrument bitcoin money (crypto-asset) revolution, like the mythical bird phoenix, rose from the ashes of the Global Financial Crisis (GFC) of 2007 – 2008. Its Genesis Block mined on the 12th of January, 2009, and 50 bitcoins first traded on the authochtonous chain codebase. According to its non-inflatable, finite money supply algorithm, only 21 million bitcoins or thereabout will ever be mined. 18 million+ bitcoins are already mined. Like gold mining, bitcoin mining, done on decentralised computer network known as blockchain, peters out 7 May, 2140.
2013 Cyprus Crisis and Bitcoin mainstreaming beginning
The first impact of the bitcoin monetary experiment on the legacy monetary and financial system ricocheted after the Cypriot crisis of finance among others causes started off by the “over-leveraged local Cypriot property companies” in 2013. As a result, bitcoin trading volume explosion happened, and bull run started because tapping bank deposits through hefty tax formed part of the bail-out plans for Cyprus by European Union (EU) and the International Monetary Fund (IMF). Thus, the foundation for safe haven asset value trust credentials for bitcoin became firmly established on the global monetary and financial stage of play, in sharp and clear contrast to the incumbent, both overused and weary system.
The United States National Debt Mountain Dance
The growing global debt stands at USD250 trillion, with a record emerging market debt at USD71.4 trillion, according to Institute of International Finance. The question is if this puts bitcoin in a better stead as the ultimate safe haven asset in financial crisis and uncertainty times?
The United States is a USD20 trillion economy whose 329,832,450 population dances on USD23 trillion sovereign debt mountain, and by extension, a good proportion of the entire world population, because of the significant pull and clout of the economy on the rest of the world. United States’s economy expends USD1 trillion annually in excess of its incomes and receipts. This way it piles more atop its already outsize, cumbersome debt burden.
The United States’s economy is a debt-based centralised economy struggling to compete with the decentralised equity-based crypto-asset bitcoin market price value. Leading credence upon that is the United States’ central bank governor, where he offered an informed opinion that the country cannot survive on the debt mountain cliffs where its citizenry future financial fate hangs like chandelier head down from the ceiling.
Bitcoin market financialisation
The first transaction though might have taken place between Satoshi Nakamoto and Hal Finney on the 12th of January, 2009, the Genesis Block as mentioned above, was created on the 3rd of January, 2009. The bitcoin crypto-asset gained value in economic terms, on the 22nd of May, 2010, when 2btc (worth more than USD80m according to the present prevailing market exchange rates) were exchanged for 2 pizzas.
During the Cypriot financial crisis period of 2013, bitcoin financialisation continued with the first Initial Coin Offering (ICO) MasterCoin (now Omni), where “5,000 Bitcoin” was raised “at a total value of $500,000”. This first ICO clinically analysed and held out in bold relief is a possible violation of the United States federal securities laws in Section 5 of the Securities Act 1933, as it patently is an arguably unregistered security offering.
Crypto-asset investment funds, which are a part of the entire crypto-asset financialisation revolution and the next wave of institutional money in crypto-assets, have risen like a phoenix from the ashes of investment vehicle strategy exit scams mostly associated with ICOs, especially those conducted between 2017 and 2018.
Family offices, VC funds, mutual funds, hedge funds, private equity funds, trusts, ETPs, to mention a few, are increasingly finding crypto-asset investment a more viable modern investment paradigm to traditional investing. A good example here:
“84% of inflows were from non-crypto hedge funds that want digital asset exposure.”.
Ipso facto, the crypto-asset investment space, as a better and innovative replacement for the classical way of investing, continues to grow. Sovereign fiat crypto-assets like Venezuela el petro and proposed China DCEP are potential, and closest quintessence of future denominations of Sovereign Wealth Funds(SWFs) in crypto-assets, allocated in various financial assets and investments such as bonds, stocks, precious metals, real estate, or alternative investments like hedge funds and private equity funds. The world’s 13th largest Abu-Dhabi Sovereign Wealth Fund (SWF) investing in crypto-assets through a crypto-asset exchange of late is a further testimony to the nascent investment growth acceleration, impact and mainstream adoption.
ICO, STO, and IEO
Security Token Offering (STO) is an attempt to conduct securities law-compliant distributed ledger token sale, and thus sanitise, and improve upon the virtually unregulated Initial Coin Offering space, where mostly greenhorn retail investors lose both money and mind.
ICOs were offerings of coins issued on a Distributed Ledger Technology (DLT) for sale to raise fund and finance a DLT-based project from testnet to mainet Decentralised Application (D’App) launch, operate the business model and nurture production market growth.
In 2019, Initial Exchange Offering (IEO) emerged, first as a Binance Launchpad innovation with the BitTorrent IEO (sold 59.4billion blockchain tokens to hit the USD7.2million hard capitalisation within a session that took 15 minutes) to address the rampant liquidity crisis that bedeviled blockchain token offerings, and improve upon other glaring shortcomings of Initial Coin Offering (ICO), and Security Token Offerings (STO).
IDO, TGE etc.
There are other token sale strategies which are less popular, but notwithstanding certainly yet emerging from the woods. Initial Decentralised Exchange Offering (IDO), or the general Token Generation Event (TGE), are some of the few examples of these token launch types. The IDO, unlike a token launch on a Centralised Exchange (CEx), takes place on a Decentralised Exchange (DEx).
Crypto-asset regulation for tomorrow’s world of money and finance
The first sovereign nation-state attention payment to crypto-assets happened in bitcoin, when the FBI published on the 24th of April, 2012, an unclassified intelligence assessment report titled “(U) Bitcoin Virtual Currency: Unique Features Present Distinct Challenges for Deterring Illicit Activity”.
The US Treasury’s FinCEN taxonomised bitcoin and other crypto-assets as “virtual currencies”, because they are no legal tenders according to sovereign states. The exception is that US entities are money transmitters, when they generate and transmit crypto-assets to “national currency”, in which case their activities come within the Bank Secrecy Act (BSA) money service business operation remit.
In 2014, a US Library of Congress report surveyed “the legal and policy landscape” on crypto-assets in 40 countries, the European Union (EU) inclusive. In a more comprehensive and updated 2018 report, 130 countries were surveyed. All of these countries and regional organisations are active, and either making new laws, regulations, policy discussions, or have their central banking authorities in research and development of Central Bank Digital Currencies (CBDCs), some of which are crypto-assets, according to those that choose to release information about their digital currency projects to the public domain.
No investment advice. This piece is for informational purposes only. Consult an investment adviser or an attorney.
Boulevard A. Aladetoyinbo, Esq. is a DLT/blockchain securities lawyer, and our Head of Crypto Capital Formation Practice. He has contributed to the knowledge database and regulatory clarity on crypto-assets at both national and international levels.
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This piece was first published by coinstituency.com.