Security tokens could change the future of cryptocurrency, bringing legitimacy and institutional capital to a bear market that sorely needs it – at least according to a new report.
“Security tokens will save crypto”, said Trevor Koverko, CEO of crypto project Polymath, during the Blockchain Futurist Conference in Toronto this past week.
Tokenized dividends were a frequent topic of discussion throughout the conference. Despite the bear market that continues throughout August, where we’ve seen bitcoin dip below $6,000 and Ether drop below $300, conference attendees remained optimistic about the future of crypto.
The future of regulated crypto could lie in Toronto and other tech hubs across Canada, where regulators are proposing new rules regarding blockchain and crypto startups. Toronto, of course, is the birthplace of Ethereum.
There’s good reason to be excited: Canadian regulators just announced plans to allow a few heavily regulated startups to sell tokenized securities to retail investors and institutional investors alike. Issuers are required to conduct thorough know you customer (KYC) checks and disclose numerous risks. However, it’s now possible and legal for a startup to launch a security token sale in Canada. Canadian businesses can now conduct legal and regulated ICOs.
Polymath added to the enthusiasm on Thursday when it announced that several startups will launch security tokens through its blockchain marketplace. Polymath’s partner CORL, meanwhile, an investment startup that will sell security tokens through the marketplace, will distribute monthly earnings to investor Ethereum wallets directly via smart contracts – similar to how dividends work in traditional financial products.
We saw a similar approach back in April, when TokenFunder conducted a regulator-approved token sale.
All of this is good news for a crypto industry that would heavily benefit from added legitimacy and regulatory clarity. Tokens that were once seen as risky, scam-prone digital assets are growing to be seen as a new, legitimate asset class.
Could Institutionalization Destroy Crypto?
Not everyone is a big fan of institutionalization. There are some who believe it will kill cryptocurrency as we know it. Centralized regulations are incompatible with decentralized ecosystems, and that’s why some believe institutionalization will “kill” crypto.
Crypto veteran Joseph Weinberg, for example, who co-founded brokerage startup Paycase and is chairman of digital identity solutions startup Shyft, told Coindesk that overzealous regulation could “kill the whole ecosystem”.
Cryptocurrency: the use of cryptography to advance monetary self-sovereignty
Tokenization: reform of securities law and development of tools for tokenizing equity and physical goods.
Two fundamentally different missions (and perhaps even separate industries entirely)
— Eric Lombrozo (@eric_lombrozo) May 11, 2018
Nevertheless, Bitcoin Core developer Eric Lombrozo feels the opposite is true. Lombrozo admits that the crypto movement is about pushing self-sovereignty forward, although he also admits that token projects can benefit from tokenizing equity and physical goods. In a tweet this past May, Lombrozo distinguished between tokenization and cryptocurrency, describing them as “two fundamentally different missions (and perhaps even separate industries entirely).”
Ethereum Picked Switzerland Over Toronto Because of Regulation
Canadian regulators don’t have to look far to find an example of missed opportunity. Ethereum’s roots are in Toronto. Many of Ethereum’s developers are based in Toronto. Ethereum co-founder Vitalik Buterin was raised in the Toronto area, and Ethereum was largely created in Toronto.
Despite these Toronto connections, however, the Ethereum Foundation was founded in Switzerland.
Canadian Member of Parliament Dan Albas told Coindesk in an interview that losing Ethereum was a missed opportunity:
“I think many of the [Ethereum] founders and employees actually live in Toronto,” said Albas in his interview with CoinDesk. “That signals to me there is something in the Canadian system that didn't facilitate their growth dreams.”
Switzerland has more lenient tax and regulatory obligations than Canada. Until Canada and other countries clarify their crypto regulations, they will likely continue losing businesses to countries with more lenient regulations.
Nevertheless, optimists are comparing Toronto’s blockchain and crypto scene to Silicon Valley and New York City – two hubs of tech innovation. Those same optimists claim Canada has a more collaborative environment than the ultra-competitiveness in other tech centers. That collaborative environment, of course, aligns with the open source attitude of most crypto and blockchain startups, where corporations are encouraged to share their codebases and knowledge with others to advance the industry forward.
“The most interesting thing about Toronto, and Canada more broadly, is despite this regulatory pushback, or in a way it's actually representative of it, is that because Canada is so small we have a very good ability to work together,” said crypto veteran Joseph Weinberg in an interview with Coindesk.
If Canada could introduce a competitive regulatory framework surrounding cryptocurrencies and blockchain startups, then hubs like Toronto could quickly rise to compete with hubs like Switzerland’s “Crypto Valley”. Canada’s new legal security token sales are a good start. We’ll see where Canadian regulators take things next.