18 January 2019

Cryptoasset sector looks set to expand but will face roadblocks

Law firm offers cautiously optimistic outlook for cryptoassets, but despite success in 2018 raises doubts over ICOs.

A report from Baker Botts predicts that institutional involvement and regulation will be key trends in the international crypto-asset sector during the course of 2019, but highlight there are several roadblocks hindering development. Sector interest and investor sentiment remain high giving cautious optimism for the crypto-asset sector in 2019. Last year saw several more nimble jurisdictions such as Malta, Gibraltar and Switzerland implementing law, regulation and issuing guidelines for crypto-assets. 2019 is likely to see larger jurisdictions following suit. France is currently developing Initial Coin Offering legislation, the USA is undertaking a bipartisan initiative and the UK Crypto Asset Taskforce is commencing regulatory consultations.

Industry standards

In the current absence of regulation, industry standards are being published by other organisations. It is highly likely that other institutional players will back crypto-assets publicly, particularly as organisations are recognising crypto-assets as a potential investment opportunity, bringing a level of experience and maturity from which the sector can benefit.

‘Flimsy’ ICOs

Although 2018 was a record year for ICOs, quality varied significantly, and many lacked an adequate underlying business product with little accountability for teams behind the ICOs. Consequently, many ICO projects failed or were found to be fraudulent, with deadcoins.com suggesting that over 900 ICO projects are no longer active. Security tokens provide an alternative to this as they are offerings which will be compliant with securities law and regulation and will include detailed information memoranda, as compared to the flimsy ‘white papers’ included with many ICOs. It is anticipated that security or asset tokens will tokenise large illiquid assets, such as real estate or media libraries, and provide rights in relation to businesses, akin to equity, or portfolios akin to unit trusts. They are likely to be a popular alternative to traditional investment products.