2017 was a remarkable year for crypto. At the beginning of the year we saw people outside of the Blockchain community start to take notice. Then we saw institutions take notice. Then we saw governments start to tiptoe around the corner to take a peek. The door is now ajar, and the general public knows of the existence of cryptocurrencies. However, despite the incredible technological revolution that took place, what actually took centre stage in 2017 were stories of wild price swings and even wilder crypto speculators becoming millionaires overnight. This inevitably drew scrutiny from regulators such as the American Securities and Exchange Commission (SEC) and the Ontario Securities Commission (OSC) as Initial Coin Offerings (ICOs) and Initial Token Offerings (ITOs) raised hundreds of millions of dollars in seed funding for distributed ledger technology projects.
We saw incredible innovative twists on the use of Blockchain technology. Buckets of money were raised to fund ideas that developers only dreamed of, from creating new decentralized platforms to moving out of their parents’ basements into luxurious shared communal houses in Palo Alto.
Given the experiences of this past year people now have a better idea of what the future may hold for crypto and Blockchain. They are also finally starting to understand the benefits of decentralization, including added security and cost efficiency. Even though the technology has been around for a decade now, people continue to describe Blockchain and cryptocurrencies as the “Wild West”. So I thought it fitting to talk about what 2018 holds in terms of the good, the bad and the ugly, in honour of the wild-western classic.
We can certainly expect the technology to take a more positive and mainstream, or “legitimate” role in 2018. Up until 2017 we invariably heard the word “Bitcoin” joined by “fraud”, “ransom”, or “money laundering”. In 2017 the focus was on volatile token price fluctuations and wealth gained or lost. Confidence from prominent figures in the business community as well as some large financial institutions has put crypto on the map for many large investors and more small investors, since we now have an historical chart that shows an upward trend. In other words: crypto investors are becoming less speculative and more sophisticated. Being able to see an upward trend beyond the volatile hourly does provide perspective.
With “legitimate” money comes more positive scrutiny and transparency, and thus more opportunity for ideas to become reality. As a result, 2018 will no doubt see a continued interest in, and contribution to, the development in the technology. Likely this will take the form of security and stability, increased speeds and efficiency, and of course, real life use cases for the distributed ledger technology beyond just ICOs and fund raising. We should also see the ICOs of 2017 start to produce more use cases for tokenization.
In addition, more scrutinous investment will come about as people start to defer to experts rather than invest on their own. Crypto funds, investment groups and investment consultants are already proliferating at an exponential rate as people with little knowledge of the space (but with social networking accounts) have been watching the token prices rise, looking for a way in. There will also likely be an increase in the number of accredited-investor only ICOs as developers start including budgets in their white papers that demonstrate the actual, realistic amounts that are required for the development of the technology, as opposed to unlimited crowdfunding initiatives that have drawn the scrutiny of securities regulators. Free air drops may become more common as well to encourage use of new platforms without drawing scrutiny.
Finally, I am going to place regulation in the “good” section, because even though securities commissions may be over-zealous at present, possibly resulting in a temporary hindrance to the development of the technology, they do ultimately have the goal of protecting the public. But you know what they say: the road to hell is paved with good intentions…just look at what is going on in China.
It should come as no surprise that the Chinese command economy has once again taken a polarized stance in its views of the crypto markets as against those of the Western economies by banning ICOs and coin and token trading. What China decides to do in the long term remains to be seen but will not be the deciding factor in the fate of cryptocurrencies.
As creative minds continue to develop the technology, we can expect to also see the creative minds of those looking to make a quick buck find opportunities to exploit the naive. Late comers to the party who have heard all their friends’ stories and are looking to make some money will have trouble filtering the quality information from the refuse. Among those profiteering from the ignorance of the newbies are the hackers, who will exploit weak wallets and unsecure ICOs. In addition, as exchanges continue to proliferate, loosely guarded private keys and logins will be exploited. Until a uniform security standard is adopted, or at least a minimum standard across exchanges, anything with a login remains vulnerable to attack.
Those same newbies will be vulnerable to misinformation. Misinformation, which already comes in the form of massive ad campaigns, fake news, spam emails and posts on various social media and affiliate marketing campaigns, will no doubt entice the innocent newcomers to invest in questionable ICOs. This is where the regulators will hopefully step in, once they bypass the tech and political barriers that stand in the way. It will be incumbent upon anyone who endeavors to invest in ICOs and ITOs to do some due diligence to ensure that the team, the tech and the product are all worth the investment.
There will likely continue to be fraudulent ICOs, and some of them, which may raise enough money, will even receive the blessing of the regulators before they are really shaken out. A massive shakeout and correction is inevitable, and although the established and proved Blockchain applications will suffer, ultimately the survivors, as with the dot-com bust of the late ‘90s, will emerge triumphant.
The shake-out alluded to above won’t be pretty. People who have invested in weak technology based on ideas, as opposed to projects with proofs of stake and work with active platforms and institutional backers, will lose. Given the open source and consensus driven nature of the Blockchain community, there will be rapid improvement, which will render some of the stronger but earlier projects obsolete unless they can adapt. Some of the established coins will also see corrections as they had several times in 2017, though if there is a major one (which people may mistake for a bubble bursting and panic-sell), the market, and the tech, will survive and bounce to new highs. The battle cry of the faithful should continue to be “HODL”, at least until the end of 2018.
Though governments have already begun to look at ways it can embrace Blockchain, they are still struggling with the contrarian paradox of how to simultaneously regulate it and encourage innovation. Tax and securities regulations will be messy while government agencies attempt to reconcile old tax and securities rules and regulations with the new reality of cross border wealth transfer transactions. Rules such as the barter transaction tax rules, which have been around since the first people traded goats for chickens, now pose new challenges as tax authorities struggle to delineate where commodities end and securities begin. Governments also have to decide whether they are going to treat these coins and tokens are securities. If they are, the securities commissions must step in; if not, sales tax will be payable on each token sale. Then there are capital gains that have to be calculated.
If you have traded on an exchange you know how difficult it is to keep track of exact fiat gains. Attempting to keep track of initial fiat investments when your conversions are between various coins and tokens, results in illegible webs of altcoins with no discernible beginning or end. Market volatility just adds to this confusion, making the calculation and provability of capital gains or losses extremely challenging.
Even though governments seem to be exploring the benefits of Blockchain, they do not appear to be embracing it wholeheartedly…yet. The irony is that if all governments were to tokenize their currencies, it could not only defeat the purpose of alt-cryptocurrencies that are intended to replace fiat, but it will also ensure 100% tax compliance and 0% government corruption! Think of how much LOWER taxes would be if that were to happen…
As difficult as it may be to predict the values of coins and tokens in the year to come, know that the underlying technology is sound and will endure. With that in mind I anticipate that 2018 will bring more innovation, confidence and therefore stability in the crypto universe.
Aaron Grinhaus is an experienced Fintech advisor and tax lawyer with a focus on crypto asset structuring and ICO advisory. If you have questions about cryptocurrencies, ICOs or anything blockchain related, please call or email us to see how we can help.
PLEASE NOTE: THIS IS NOT INTENDED TO BE LEGAL ADVICE AND SHOULD NOT BE RELIED ON AS SUCH. IT IS IMPORTANT THAT YOU CONSULT WITH A LICENSED PROFESSIONAL.