What a difference a year makes. In the cryptocurrency world, that truism is such an understatement, a year might as well refer to a decade, and 2018 was no different. Over the course of the year, initial coin offerings (ICOs) went from a darling way to fund upstart businesses to a coded term for cryptocurrency scam. Legitimate US cryptocurrency investors, skittish of making a wrong step amid a lightly sketched regulatory framework, have begun to decamp abroad for an business environment less privy to punitive fines. Washington, loath to lose out on innovation and face potential threats to economic and technological security, have begun to shore up cryptocurrency in a bid to keep it from moving offshore.
A pivotal moment in cryptocurrency regulation was in September, when a Congressional panel helmed by Rep. Warren Davidson (R-Ohio)called on a few dozen cryptocurrency thought leaders to weigh in with their thoughts concerns before a government roundtable. The resulting testimony has been the cornerstone of draft legislation on cryptocurrency, including the Token Taxonomy Act of 2018. Released December 20, 2018 and authored by Davidson and Rep. Darren Soto (D-Fla.), the legislation has left stakeholders in the cryptocurrency industry — investors, issuers, and tech developers alike — sanguine about the possibilities for crypto investment in 2019.
Among those thought leaders present before Congress is Kyle Asman, partner and co-founder at BX3 Capital, a business advisory firm dedicated to helping businesses break into and get situated in the blockchain and cryptocurrency sectors. We sat down with Kyle to pick his thoughts on the draft bill on tokenization, institutionalization of crypto, price predictions, and how he sees SEC enforcement playing out during the coming year. (The interview has been edited for flow and length.)
First off, what will be at the forefront of crypto investors’ minds as 2019 gets underway?
Kyle Asman: I think it will be a few things. One will be the price of the existing assets, two will be security tokens, and the third is going to be regulation. I think a lot of people are interested to see what federal regulation is going to come out and what that regulation is going to do. I think a lot of people are looking forward to the continued rise of security tokens and regulated assets. Many can’t invest in assets that aren’t registered with the SEC, a category into which many crypto-denominated assets fall.
Could you elaborate a bit on those points?
Kyle: From a regulatory perspective, we have the bipartisan Token Taxonomy Act of 2018, the text of which came out just before the holiday break. We’re hoping that it provides a lot of clarity for the industry. Number two: No matter what, I believe that security tokens are going to be a valuable asset. I’ve talked to a number of people across a number of industries and it’s pretty much a widespread belief that security tokens are how the crypto market is going to go.
What, in your opinion, is the thinking beyond this Congressional cryptocurrency legislation?
Kyle: I want to point out that cryptocurrency is a topic with bipartisan appeal and support, as we see with the backers of the Davidson/Soto bill. Democrats want to make sure investors are protected and consumers are safe. Republicans are big on economic growth. When it comes to cryptocurrency, we need both a regulatory framework and room for expansion. That’s why light-touch regulation is the way forward. Without it, cryptocurrency could be the Wild West. And no one would feel safe.
Let’s rewind a bit: I know we’re talking about looking forward to 2019. But I am curious to know, what do you wish you could go back and do differently now that you know how the 2018 market played out. What would you change? What would you love to be able to tell your past self?
Kyle: I would have loved to go short against the market. I think everybody knew it was coming down. But I think the problem was nobody knew just how far it would fall. I mean, I expected Bitcoin to come back up somewhere around $10,000. I didn’t necessarily expect it to go down to $3,000. I was going to say that I would like to help people better to comply with regulations and prevent SEC enforcements but at the same time, I don’t think there is really anything I can say that I would’ve done differently — other than bet against the market, that is.
That answer provides an effortless segue into my next question. Is the crypto market volatility we saw in the latter half of 2018 going away anytime soon?
Kyle: Yeah, no. I don’t think that we are going to get rid of the volatility any time soon. I do think those market conditions make it awesome for a lot of traders, though: shorting, going long — fun things like that. As far as when we will see volatility tamping down, I don’t know; probably two or three years. It will likely be once we see more liquidity and institutional capital on the market place.
Beyond market volatility, one thing crypto investors would like to leave behind in 2018, is the failed ICO. How should token issuers move forward in 2019? How should crypto investors proceed when considering new coin issuances?
Kyle: Investors are still confident in how yield placements and regulated securities. This being said, when it comes to ICOs, a lot of the stuff in 2018 and in late 2017 just didn’t make sense. I mean, how you could make money off of a company that didn’t yet make any revenue? The idea is unfathomable. Some adventurous capitalists caught wind of the concept and that’s when they knew something was wrong. There is never a time you can make money off of an asset that has no value. That was a blaring red flag in the marketplace.
I would say invest in companies that are producing revenue and are growing on a steady basis. When it comes to pre-revenue, pre-user-based companies, look for a strong MVP (minimum viable product). Look for strong teams. And of course, look for financial backing.
Do you think we’ll continue to see the market use the term ICO or has that been corrupted enough that we need to change it?
Kyle: I think that anybody that uses “ICO” is also somebody that uses the term “cell phone” to describe a cell phone. You can use “cell phone” to differentiate from iPhone. If you use ICO to describe your crypto project, you probably haven’t been in this business very long. The term has gotten tarnished.
What do you think will take the ICO’s place?
Kyle: There hasn’t yet been a consensus yet. There’s ITO and other variations of ways to say that you’re raising capital via tokens. Something will emerge as the gold standard for security token. I’m not quite sure quite yet what that will be.
How do you see cryptocurrency markets performing compared to the traditional capital markets during the coming year?
Kyle: We might actually see some outperformance in crypto as an alternative investment. Besides, Bitcoin doesn’t have much more room to go lower. I don’t see how Bitcoin could go below $3,000. If you’re measuring on a calendar year from 1/1 to 12/31, I think that there’s a good chance that crypto assets could outperform equities and bonds. Interest rates will likely stagnate on bonds. Equities might slump a little in terms of earnings. The market got a bit overheated this year and we might find ourselves in a midst of a correction — not necessarily a recession but a bit of a slowdown. As for crypto, it’s only up from here.
You mentioned institutional investment as being a likely stabilizer for the crypto market. Mind elaborating a bit? How will crypto work in terms of asset allocation?
Kyle: The first thing institutions will need is for the infrastructure to be built: the banking solutions, the transferring solutions. You certainly see some of it with Fidelity and other asset management firms that have made moves into crypto. I don’t think we’re really going to see institutionalization of cryptotake off until the second or third quarters of 2019 or so.
Why Q2 or Q3 next year? Why not earlier this year?
Kyle: That’s about how long it is going to take for companies to build out the necessary infrastructure to get built, such as the data privacy teams and security teams, to tough it out and be ready to move forward.
Private placement opportunities might be an arena in which we see plenty of action. I mean crypto is been driven mostly by a handful of retail investors. The pension funds, the endowments, the sovereign wealth funds; they haven’t really invested yet. There’s ton of upside.
One final question: If you had a half hour with policymakers who are working with cryptocurrency, what would you tell them based on your experience in the space?
Kyle: I would tell them the time to act is now. The market is really at a point where it is ready to evolve. Enforcement actions don’t necessarily help. If you’re failing to comply with the law at this point, you’re dancing with the devil. The SEC has fired plenty of warning shots and given guidance at this point. If you’re not compliant by now, you have no excuses.
It’s crucial that the SEC reach out and listen to members in the industry. Collaboration among all involved and interested parties in cryptocurrency should be the ultimate goal.