“Institutional Crypto” is Coming Soon

What does that mean? How does it affect Escape Artists like you?

This article was published in the Escape Artist Weekly Newsletter on October 31, 2018. If you would like to subscribe to the newsletter, please click here.

This week, Brian June, a longtime friend and speaker at the upcoming Escape Artist Conference in Dallas, Dec 1-2, is my guest columnist with an article on crypto. His insights are powerful and mirror many of the articles you may be reading and conversations you are having. I know that crypto and the blockchain continue to be a major topic of conversation at the events I attend and at which I speak.

You’ve probably seen the several articles written in this column about crypto, Bitcoin, and the blockchain, especially as it relates to real estate. There’s a reason for this. ECI is one of the few Real Estate companies that accepts crypto and Bitcoin for property purchases.

Numerous folks have taken advantage of the opportunity to diversify some of their crypto assets into property. Savvy investors know that diversification is critically important, even if it’s just 15-20% out of a concentrated asset group. Many crypto investors are “all-in” with crypto. And that’s great……. until it isn’t.

Wisdom and prudence mean allocating some of your newly found wealth into other asset classes. Real Estate is a phenomenal hard asset, especially real estate in developing markets. If you’ve made a handsome return in crypto, reach out right now, request some information, and explore some other assets with a small piece of your new wealth. You’ll be glad that you did.

Now here’s the article from Brian. And remember, if you’d like to see him in person, the upcoming Escape Artist Conference in Dallas, Dec 1-2, 2018, is a great place to do that. He has a ton of insights from 8 years in the business that he’ll only share face-to-face. You’ll also enjoy a special focus on some tax strategies for crypto investors that could make a huge difference in how much you get to keep. Enjoy the article and be in touch.

“Institutional Crypto” is Coming Soon

What does that mean? How does it affect Escape Artists like you?

The term Institutional Crypto itself is curious, to say the least. Crypto was born ten years ago on October 31, 2008, when a person or persons under the pseudonym Satoshi Nakamoto published a white paper describing how computer networks and cryptography could be used to circumvent banking institutions and central banks. Indeed, one of the early and ongoing stated goals of crypto was to provide alternative payment methods to centralized and expensive banking.

This tug of war, David vs. Goliath battle is, in my opinion, one of the primary reasons that crypto as an asset class has not (yet) taken hold.

Now it appears that Goliath is winning. And 2019 will see the rise of “Institutional Crypto,” and along with it the financialization that occurs when massive investment flows into an asset class. My bet is that along with these inflows, crypto will break out hugely to the upside, enabling retail investors the opportunity to profit from these institutional inflows.

Whether you view Institutional Crypto as a badly needed innovation or a terrible loss for the average person will depend upon your beliefs surrounding money creation, banking, debt, and centralized governance vs. laissez-faire enterprise.

All of this and more is a part of the schism that’s been inherent in crypto from day one. Average Joe vs. Wall Street. David vs. Goliath.

Dateline 2019: 3 Big Changes Underfoot

There are at least three sea change trends driving this move away from David and toward Goliath:

1. The Birth of Institutional Investment and Trading

Among the biggest trends to watch is the ascendency of institutions and traditional brokerages jumping into the crypto space. On October 15, 2018, Fidelity Investments made it much easier for hedge funds and other institutions to invest in cryptocurrencies. A new Fidelity entity, Fidelity Digital Asset Services, will provide custodial services (they will be responsible for your private keys) and enable cross-platform trades for large block digital assets. Fidelity is the 4th largest asset manager with over $2.5 trillion under “administration.” Goliath 1, David 0.

In addition, one of the most influential endowment managers, David Swensen (Yale University), just jumped into crypto with bets on two Silicon Valley funds with a purported $300 million investment in Andreessen Horowitz’s crypto fund. Yale University’s $29.4 billion endowment is number 2 in the U.S., second only to Harvard at $39.2 billion. Goliath 2, David 0.

You ain’t seen nothin’ yet. The biggest Goliath of all institutional investors, the Intercontinental Exchange, ICE, owner of the New York Stock Exchange, is soon launching Bakkt, a crypto exchange in partnership with Microsoft. The anticipated launch date is sometime in December 2018, just in time to kickoff the new year. Weighing in at $18.5 trillion, when the NYSE speaks, people listen! (Ok, the NYSE is not and never was E.F. Hutton, but I couldn’t help myself!) Goliath 3, David 0.

All of the above is just the beginning. Crypto will see a much heavier institutional influx in 2019, especially in the sheer numbers of institutions that will jump in and run with the “Big Dogs,” ahem, make that “Goliaths.”

2. The Rise of Asset Tokenization

The world is full of assets, including real estate, gold, oil, stocks, bonds, derivatives, and intellectual property.

Asset Tokenization is the concept of turning assets of all classes, especially physical assets such as real estate, into a token that can be immutably exchanged, almost instantly on the blockchain. The tokens are then used as currencies to transfer full or fractional ownership of assets or objects outside the blockchain.

In the real estate space, one interesting effort is already underway, called Ubitquity. Ubitquity is an enterprise level project to tokenize title records on the blockchain.

Like Oil & Gas investments? Well now you can invest in fractional tokens using Permian.io. Permian is bringing “the oil play” to the masses using blockchain as the vehicle.

I could go on almost forever with these examples, but you get the point. In the future, all that can be digitized and tokenized will be.

You must understand, I’m not recommending these two examples at all. I’m simply letting you know what’s coming. In 2019, you will see a dramatic rise in Asset Tokenization across all asset classes. In the proper regulatory environment, many new investors will, no doubt, look at these as viable investment opportunities – investors that in the past may not have known or been able to invest in these types of assets. Split decision: Goliath 4, David 1.

3. The Death of ICOs (Reborn as STOs)

This institutional race is occurring just as the mania for initial coin offerings (ICOs) has tapered to near zero in the United States. The combination of “Dead Coins,” more than 1000 according to TechCrunch, and regulatory threats from the Securities and Exchange Commission (who posits that almost all ICOs are in violation of securities regs), has slowed U.S. based ICOs to a virtual standstill.Consumer Resource Guide

By the way, most early ICOs deserved to die in my opinion, but that doesn’t mean that they all were bad. Quite the contrary. Many are doing very well indeed, thank you very much!

But just because ICOs are dying, doesn’t mean that the innovative  “ICO-like” financing is dead. There’s a new kid in town: The Securities Token Offering, or “STO.”

An STO is far more similar to a Reg D Rule 506 offering than it is an ICO. ICOs do their best to avoid being classified as a security. The reason is that with some certainty (not 100%), the SEC has said that any ICO offering that is not a “utility token” will be deemed a security and, thus, be subject to either registration with the SEC (and state “Blue-sky” administrators) or must take advantage of a registration exemption.

STOs are, by contrast, essentially a crypto-based version of a more traditional Reg D offering as stated above.

And here’s the point. Almost all ICOs were done with minimal, if any, legal guidance. The founders and promoters simply wrote a “White Paper.” And rarely did this ICO White Paper include the disclosure documents found in a Reg D offering. Remember that Reg D offerings are almost always drafted, assembled, and given a de facto blessing by a law firm as “standard” offering documents. No “standard” offering documents equals no legal fees. And please remember: Institutions, especially law firms, love legal fees. (Hey, I love my attorney, I really do. I realize that he, like me, has to support his family and deserves to be paid for his efforts.) That said, major law firms like those that represent the major institutional investors, have been known to drive costs upward from time to time!

Thus, in 2018, the STO became the reborn ICO as law firms began to write and rewrite the rules for an ICO. Basically, an STO is an ICO with all the legal trappings and blessings of a law firm! Pretty cool, don’t you think?

All said, I expect STOs to have a net positive impact on cryptocurrency and blockchain offerings going forward. STOs and smart contracts might truly help to, among other benefits, efficiently manage cap tables and possibly bypass aspects of “standard” underwriting by using a direct issuer-to-investor model. Split decision: Goliath (law firms) 5, David 2.

Despite scoring a point for the Average Joe, the impact will still be mostly felt by traditional investment firms and other accredited investors who participate in securities markets.

In the end, STOs, while helping reduce some complexity of securities offerings at the margins, will not be about democratizing finance, as the ICO phenomenon model was.

Final Score: Goliath 5, David 2.

So, there you have it: Institutional Investors are coming for your blockchain. They are coming for your crypto. 2019. Big time. No doubt. So as an Escape Artist, what should you do?

First, educate yourself and stay current. This technology is moving at lightspeed. Really. The Escape Artist Conference in Dallas, December 1-2, is a great place to start. I’ll be there and will share a decade of crypto insights with you in person.

Next, if you haven’t already, consider investing a small portion of your investment funds into select crypto and blockchain investments that have the potential to reward you with outsized returns. If your goal is to profit from the major 2019 (& beyond) trends, Bet with Goliath.

Even a small investment could greatly enhance your “escape plan” with gains and dividends (yes, I did say dividends) lasting long into the future.

If you have a large amount of Crypto, consider moving some of it outside the blockchain into another hard asset such as beachfront land. As Will Rogers once said, “They aren’t making any more of it.”

Finally, be safe and enjoy the journey! Why be an Escape Artist if you can’t do that? Hope to see you in Dallas, December 1-2.

– Brian June

Brian is an Author, Adventurer & Serial Entrepreneur. For more than 40 years, he’s been a student of humanity, markets, & empires. He’s a principal of two crypto OTC trading firms (iBuyTezos and The Coin Trading Company) and loves to explore life and the planet with his wife Val.

Thanks, Brian. Looking forward to sharing some time and more conversations in Dallas next month. Hope many of you will join us. Until next week, all the best.

This article was published in the Escape Artist Weekly Newsletter on October 31, 2018. If you would like to subscribe to the newsletter, please click here.