A technical indicator that incorporates both bitcoin’s price and trading volume is signaling the cryptocurrency may have bottomed in December.

The money flow index (MFI), also known as the volume-weighted relative strength index, is used to identify buying and selling pressure and oscillates between zero to 100. A rising MFI indicates an increase in buying pressure, while a falling MFI is considered a sign of increasing selling pressures.

Essentially, the MFI validates or confirms price trends. Many times, however, the indicator diverges from the prevailing market trend.

For instance, BTC dashed hopes of a long-term bullish reversal with a break below $6,000 on Nov. 14 and hit a 15-month low of $3,122 on Dec. 15. The 14-week MFI also nosedived from the high of 43.00 in mid-November, confirming the sell-off in prices.

The indicator, however, bottomed out with a higher low at 22.00, contradicting the lower low in bitcoin’s price. That bullish divergence is widely considered an early warning of a bearish-to-bullish trend reversal. Supporting that argument is the fact BTC snapped its record six-month losing streak with a 10 percent gain in February and the MFI rose from 25 to 44.

Other indicators like the moving average convergence divergence (MACD) and the bearish crossover of the 50- and 100-week moving average are also signaling long-term bearish exhaustion. These tools, however, don’t incorporate trading volumes. The MFI, therefore, stands out as a more reliable technical tool.

That said, with a number of indicators pointing to bullish reversal, the probability of BTC picking a strong bid a year ahead of the mining reward halving appears high.

As of writing, BTC is trading at $3,785 according to CoinDesk data.

Weekly chart

As seen above, the MFI diverged in favor of the bulls in mid-December, despite BTC sliding to lows near $3,100. Further, it carved out another higher low at 25 at the end of January and is now rising toward the upper edge of the channel. A breakout on the MFI, if confirmed, would reinforce the bullish divergence witnessed in December.

When it comes to BTC, $4,190 is the level to beat for the bulls, as it is the high of the inverted bullish hammer carved out last week. That candlestick pattern indicates the bulls are beginning to test bears’ resolve to keep prices low – a sign the market is bottoming out.

A convincing move above $4,190, if backed by a rise in the money flow, could yield a rally toward the psychological resistance of $5,000.

The bullish case presented by the MFI would weaken if the February low of $3,328 is breached with high volumes.

Disclosure: The author holds no cryptocurrency assets at the time of writing.

Bitcoin image via Shutterstock; charts by Trading View

Randy Wilson is a partner in Digital Risk at Deloitte.

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2019 will be the year the rubber meets the road for blockchain consortia.

If 2017 was a buzzy time that saw a number of successful proofs-of-concept launch, 2018 was a more sedate period when the lawyers got together to develop the framework under which consortia could operate. However, 2019 will be the year that these platforms go live and expand across commodities, processes, markets and geographies.

By now, the benefits of the technology have been demonstrated; the next step is to make this technology work at scale, that is, to build the shared platform that addresses industry challenges, benefits the majority of market participants and convinces the transacting ecosystem to embark on the journey.

The consortium model

The preferred vehicle for launching enterprise-grade blockchain platforms is the consortium.

The idea is simple: If we as a group have enough volume and can drive sufficient liquidity across our platform, the rest of the market will join and transact. Market participants working with their peers have an edge over tech start-ups when it comes to creating a common approach and driving adoption of the platform.

The formation of the Intercontinental Exchange (ICE) provided a replicable example: a leading group of companies and banks came together to create a common derivative platform and the initial investors retained ownership over it.

Now the model is being re-applied across the value chain in the energy sector and beyond. First movers that can bring enough volume onto their blockchain platform will eventually compel the entire market to adopt their technology. The tipping point is estimated to be around 70 percent.

If you can get that share of entities to do business on the platform, the remainder of the market will have no choice but to follow. But time is of the essence: attract only 25-30 percent of the market and you will be stuck serving a fragmented group of clients with little chance of creating attractive positive returns. We have seen many shared industry platforms featuring other technologies suffer this fate.

Near-term growth is still quite challenging even if a platform launches successfully. Large companies have concerns about the enterprise readiness of blockchain technologies and are hesitant to commit live transactions to the platform.

Many want other consortium members to go first so they can identify and remediate significant risks. It is difficult to get a platform going if members adopt such a ‘wait and see’ approach.

Attracting non-members to use the platform can be a challenge. There is usually very high interest at the start of a consortium from parties outside the initial investor group, who also want to get in with some skin. The original investors like the added trade volumes the outsiders bring, but not necessarily seeing their share in the entity diluted. This can result in a serious stalemate. Why would a non-member help a competitor create a platform if they are not adequately compensated for involvement?

The answer is: if they are forced to use the platform because the rest of the industry has adopted it as the place to trade. This must be managed carefully. Failure to do so could encourage outsiders to form a competing consortium. The last thing anyone wants is the emergence of 10 or more rival platforms.

Evolving the model

Two of the most common business models for consortia-led blockchain ventures are as non-profit or for-profit entities. The non-profit approach is most often focused on an industry challenge that has a significant social impact. Such entities often operate as opensource projects and have public or third-sector involvement. The for-profit model is used where development is private sector-driven and where there is the promise of an exceptional medium-term valuation as seen in many supply chain-related ventures.

But another model exists that can encourage broad market participation, and also provide initial investors with a means for creating and recouping value around the platform. The traditional utility model remains relatively unexplored when it comes to blockchain ventures and may hold special promise here – not as the solution, but as part of a hybrid model.

In this model, a consortium first provides basic capabilities – network consensus, transaction distribution and verification, basic smart contract templates, tokenized assets, digital documents, among others – as a kind of utility. Usage fees are established using a cost-based model, and any excess revenue is distributed back to all market participants based on some measure of use, such as volume/value channelled through the platform.

This addresses the issue of founding members having too preferential a position relative to other participants. The consortium can then focus, through a second legal entity, on establishing the second-order benefits unlocked through wider adoption and effective use of the base layer.

Here the opportunity is to create market-specific solutions that harness the core capabilities and further embed the specialist user interfaces, business rules, process flows and data analysis dashboards needed by particular groups of participants. In such a scenario, the core platform could even be opened to rival consortia who would also stand to gain from developing on a common underlying platform.

Wait – did we just invent public blockchain? Well not quite, not yet at least. For some considerable time to come it will remain necessary for consortia groups to maintain a level of control over the operation, accessibility, security and performance of new networks.

The role of data

Energy companies are now cognisant of the value of the data they create. Just as consumers have much greater awareness that the data they provide has value, so too do organizations.

A successful blockchain platform will eventually secure a rich, validated set of transactional data unmatched anywhere else within the industry and it will enable market participants to be firmly in control of when with whom, and how much they share. Those companies will insist that any value received for data originating within their organization and used by some entity in the future flows largely back to the source.

The platform’s role in managing reference data (the countless registers of facilities, ports, vessels, routes, products, deal specifications, procedural documents and even contractual templates) can also provide very real industry value. Many companies would pay a platform provider for access to reference data if they trusted the completeness and reliability of the source.

Recommendations

Several lessons can be learned from the formation of blockchain consortia to date that can be used by other potential adopters, and the most important are around the structure and strategic alignment.

Create a new legal entity structure to deliver your blockchain solution. Separate standalone legal entities allow large industry players to jointly invest in an innovative environment, protects their interests and provides the right level of operational flexibility. The trick is to address the risks involved with investing in a consortium, but not constrain its ability to make decisions effectively.

Structure to maximize adoption, not profit. The goal is to encourage adoption and participation outside of the core members. Models that give too much profit to too few members have struggled and many have failed.

Form an independent board. The board must transition from individual members actively involved in setting up the new entity to those who can focus on the longer-term strategy. It is important to move from a project steering group to an independent board.

The key is to find the right model that adequately protects the interests of the investors, encourages adoption and also promotes the flexibility and innovative spirit essential for a successful start-up. A consortium is a group with a shared goal and it is crucial to be smart about creating a structure that gives the members the best chance of making the right trade-offs.

Exit and entrance image via Shutterstock

Benjamin Sauter and Jake Chervinsky of Kobre & Kim LLP are litigators and government enforcement defense attorneys who specialize in disputes and investigations related to digital assets. This article is not intended to provide legal advice.

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As we enter the second year of this so-called “crypto winter,” the stablecoin market is hotter than ever.

In recent months, stablecoins – digital assets pegged to the value of fiat currencies like the U.S. dollar – have exploded in size and variety thanks to high-profile offerings from companies like Circle, Paxos and Gemini. Even traditional banks are joining the action, with JP Morgan recently announcing its own stablecoin-like product called JPM Coin.

Thus far, stablecoins have largely avoided public scrutiny and criticism from agencies like the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), which have focused their attention on the many issues arising out of the 2017 initial coin offering bubble instead. Yet, as stablecoins see greater capital inflows and industry adoption, the SEC and CFTC will likely take a harder look at their compliance status.

Unfortunately for stablecoin proponents, agencies like the SEC and CFTC are often quick to assert their jurisdiction over new financial innovations, even if their intervention may not serve the best interests of an emerging industry.

Stablecoins 101

Stablecoins promise many of the same benefits as other cryptocurrencies – like cheap transactions and rapid settlement – without the price volatility typically found in the crypto markets. Through that combination, stablecoins could satisfy the demand for high-quality fiat currencies in parts of the world with limited access to the global financial system, like Iran or Venezuela.

Stablecoins also could be useful for crypto exchanges that want to offer fiat-based trading pairs while reducing their engagement with legacy financial institutions.

To maintain their one-to-one peg with fiat currencies, most stablecoins use either a fiat-collateralized, crypto-collateralized, or algorithmic model. Fiat-collateralized stablecoins are backed by actual fiat currencies held in reserve by the stablecoins’ issuers, whereas crypto-collateralized stablecoins are backed by digital assets locked in smart contracts.

Algorithmic stablecoins, by contrast, aren’t backed by collateral at all. Instead, they use various mechanisms to expand or contract their circulating supply as necessary to maintain a stable value.

It was this type of stablecoin that apparently caught the SEC’s attention last year.

A basis for concern

In April 2018, an algorithmic stablecoin project called Basis made headlines when it raised $133 million from several prominent funds and venture firms. But, only eight months later, Basis shut down unexpectedly and returned its remaining capital to investors. The reason for the shuttering, according to Basis CEO Nader Al-Naji: “We met with the SEC to clarify a lot of our thinking [and] got the impression that we would not be able to avoid securities classification.”

It’s not hard to see why the SEC might view Basis through the lens of a securities offering.

The Basis protocol was designed to maintain stability by auctioning “bond” and “share” tokens to investors who would profit as long as Basis held its peg. Tokens like these could qualify as “investment contracts” under U.S. law, and thus may fall within the definition of a security. Apparently, the Basis team decided that the regulatory requirements imposed by that classification were too onerous to overcome.

Despite Basis’ startling end, there hasn’t been much discussion in the crypto industry about how U.S. securities and commodities laws might apply to stablecoins.

In fact, most industry players seem to take for granted that fiat-collateralized stablecoins are safe from regulatory scrutiny. That assumption may prove dangerous.

Stablecoin regulation under federal law

Most dollar-backed stablecoins are created in roughly the same way: purchasers deposit dollars with a stablecoin issuer, and in exchange, the issuer mints and returns an equivalent amount of the stablecoin. The process also works in reverse: stablecoin-holders can send a stablecoin back to its issuer in exchange for an equivalent amount of dollars.

Given how these stablecoins are redeemed, the SEC might characterize them as “demand notes,” which are traditionally defined as two-party negotiable instruments obligating a debtor to pay the noteholder at any time upon request.

According to the Supreme Court’s 1990 decision in Reves v. Ernst & Young, demand notes are presumed to be securities under Exchange Act Section 3(a)(10) unless an exception or exclusion applies.

For its part, the CFTC might take the position that stablecoins are “swaps” under Commodity Exchange Act Section 1(a)(47)(A). That provision defines swap to include an “option of any kind that is for the purchase or sale, or based on the value, of 1 or more interest or other rates, currencies, commodities, or other financial or economic interests or property of any kind.”

Under that definition, the CFTC might characterize stablecoins as options for the purchase of, or based on the value of, fiat currencies.

Of course, individuals and companies dealing with stablecoins will have good arguments as to why the “demand note” and “swap” classifications shouldn’t apply. For example, issuers could invoke the Reves court’s “family resemblance” test for demand notes, or challenge the CFTC’s jurisdiction over retail foreign currency options, depending on the circumstances. The regulators, however, may take a different view.

What could this mean for stablecoins?

If stablecoins are classified as regulated securities or swaps, there could be serious consequences for a large segment of the crypto industry. For example, stablecoin issuers might have to register their offerings and comply with all the ensuing regulatory requirements. Similarly, a company or fund that conducts or facilitates stablecoin transactions might have to register as a broker-dealer.

Plus, the SEC and CFTC aren’t the only regulators that may take an interest in stablecoins.

Only time will tell how other state and federal entities, such as the New York Department of Financial Services (NYDFS) or the Financial Crimes Enforcement Network (FinCEN), will approach the regulation of stablecoins, particularly if they’re used to evade trade sanctions or other transaction reporting obligations.

For now, it’s clear that anyone who issues or uses stablecoins should give considerable thought to their potential risk under U.S. securities and commodities laws.

U.S. Capitol building image via Shutterstock

Michael J. Casey is the chairman of CoinDesk’s advisory board and a senior advisor for blockchain research at MIT’s Digital Currency Initiative.

The following article originally appeared in CoinDesk Weekly, a custom-curated newsletter delivered every Sunday exclusively to our subscribers.

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If you want to test a cryptocurrency newcomer’s grasp of the design principles of permissionless record-keeping networks, tell them it wouldn’t matter to bitcoin if ISIS were running a node.

The statement can provoke a look of alarm. But it helps to make the point that the security model behind bitcoin and other decentralized cryptocurrencies – the way they resolve the Byzantine General’s Problem – is independent of the question of who is participating in the network. ISIS’s intent, evil as it would no doubt be, is irrelevant if it has less than 50 percent control of the network.

It’s also a good way to draw a distinction between the ostensibly “trustless” nature of the underlying ledger and the fact that so many of the businesses that provide services for cryptocurrencies – exchanges, custodians, price feeds and so forth – actually function as trusted third parties.

The point is that once you have to trust someone or some entity, then the question of who they are really does matter. That’s the lesson everyone should take from the PR disaster that Coinbase brought upon itself with its recent acquisition of the rather dodgy blockchain analytics firm Neutrino.

Precisely because it acts as a steward and custodian of a very large amount of people’s funds and assets, Coinbase’s business model depends on it building up and maintaining trust with its customers.

And as it learned last week, that can be a complicated exercise, one that goes far beyond what the entity does, to include how its messaging and its dealings with others are perceived.

The Neutrino-Hacking Team connection

After BreakerMag’s David Z. Morris pointed out that the founders of Neutrino were the same folks who headed up Hacking Team, a notorious Italian IT firm whose software has helped authoritarian governments spy on their citizens, a #DeleteCoinbase movement arose on Twitter and elsewhere.

The backlash isn’t surprising. In a report that identified Hacking Team as one of five “corporate enemies of the Internet,” Reporters Without Borders documented the outfit’s cooperation with a wide range of governments around the world, including Sudan and Morocco, enabling them to “commit violations of human rights and freedom of information.”

The Washington Post reported that Hacking Team once worked with the Saudi enforcement unit that was later involved in the murder of the newspaper’s correspondent, Jamal Khashoggi. A Toronto human rights group found that the firm had helped the repressive Ethiopian regime monitor expatriate dissidents’ activities.

It’s not clear how many users have actually deleted their Coinbase accounts in response to these revelations. Some reported difficulty in withdrawing their bitcoin balances to zero, a pre-requirement for closing an account; the amounts left were too small to easily transfer on-chain.

That prompted developer Udi Wertheimer to create #DeleteCoinbaseTrustChain – a play on the Lightning Network Trust Chain – to create a chain of Coinbase users transferring residual bitcoin to each other on the company’s books so they could drain and delete their accounts.

Either way, it’s impossible to put a positive spin on the branding impact of the Neutrino decision – which is why it’s also really important to look at Coinbase’s response to it.

Misplaced messaging

As of the time of writing there had been no update on the Coinbase blog beyond the upbeat announcement of the acquisition from engineering director Varun Srinivasan.

In a statement to The Block, however, Coinbase said it was “aware that Neutrino’s co-founders previously worked at Hacking Team, which we reviewed as part of our security, technical and hiring diligence,” adding that “Coinbase does not condone nor will it defend the actions of Hacking Team,” but “it was important for Coinbase to bring this function in-house to fully control and protect our customers’ data and Neutrino’s technology was the best we encountered in the space to achieve this goal.”

Elaborating on why this was important, Christine Sandler, the company’s head of institutional sales, told Cheddar that the previous third-party providers “were actually selling client data to outside sources.”

Well, good thing that’s coming to an end. But the company’s argument – that this is best-of-class tech and that by bringing it “in-house” the company can be sure that it will “fully control and protect our customer’s data” – depends entirely on the presumption that users can trust Coinbase to act in their interests.

And trust isn’t as easily maintained as Coinbase seems to think it is. Hiring people who worked on such unsavory projects as the Hacking Team is a good way to lose it.

I’m not suggesting that Coinbase intends to surveil or otherwise abuse the rights of its customers. It has been a mostly faithful and trustworthy steward of its more than 20 million users’ assets. There’s nothing to indicate that it won’t continue to work hard to protect them.

But Coinbase is a trusted third party. To succeed it must develop, nurture and maintain the public’s trust. And as the saying goes, it’s very difficult to engender trust and easy to lose it.

This requires more than just living up to legal and de-facto fiduciary duties. It’s about how the entire company behaves, with everything from its blog posts to its corporate decisions under scrutiny.

An alternative that can be trusted

Banks and other financial institutions have been well aware of this challenge for years. It’s why they work hard on their branding – using words like “trust” and “fidelity” in their names and product offerings, and associating their logos and other corporate iconography with images of strength and dependability.

Even so, because of their poor behavior in recent years, public trust in banks is near all-time lows. Not that this has caused them to lose much business; most people feel they have no choice but to deal with banks if they are to transact in the real world. (Even among competing banks, switching costs, such as the hassle of changing direct deposit for paychecks, have historically made consumers “sticky,” or disinclined to switch providers.) It’s a captive audience, but a miserable one.

Perhaps Coinbase is relying on similar inertia, and maybe it can even afford to, given its massive user base and relative ease of use compared to most crypto exchanges. But if it wants to be a real alternative to the complacent, too-big-to-fail banks, Coinbase and others like it must hold themselves to a higher standard. They have to win the public’s trust.

Even if the Lightning Network and other decentralized technologies start to allow cryptocurrency users to more easily “be their own bank” and manage their assets without relying on exchanges or custodians, trusted entities will continue to play vital roles in the crypto ecosystem. In any case, we’re a long way from having those new technologies operate at scale.

Can Coinbase survive the Neutrino controversy and the #DeleteCoinbase movement? Possibly.

Yet the fallout from its decision and response affect confidence in the entire field of cryptocurrencies.

If the company and other such intermediaries want to help the industry grow and, in so doing, succeed in building their own respected brands, they need to work a lot harder at winning the trust of the people they serve.

Coinbase image via Shutterstock

“When the Ethereum Foundation was founded, the Ethereum Foundation was ethereum. People in the Foundation were the ones that were building ethereum. Now, that’s not the case.”

That’s Aya Miyaguchi, executive director of the Ethereum Foundation, the non-profit organization founded and dedicated to the continuing development of the world’s second-largest blockchain by total value.

Since Miyaguchi’s appointment in early 2018, however, the ethereum platform has faced severe market turmoil, with the price of the blockchain’s native cryptocurrency, ether, dropping from a high of roughly $1,100 in early 2018 to roughly $130 today. Further, it’s seen rising competition in the form of new blockchains touting more advanced smart contracts and more sustainable decentralized application infrastructures.

Still, Miyaguchi tells CoinDesk that, in her view, the important change over that time as it relates to the role of the Ethereum Foundation is not ether’s fluctuating price or the shifting market for blockchain infrastructure, but rather ethereum’s growing community of global developers.

“With the nature of open-source technology, [ethereum] has changed over the years and the entire ecosystem has grown a lot bigger,” said Miyaguchi.

Giving a short address at the opening of the second annual ethereum hackathon, ETHDenver, Miyaguchi highlighted her desire to see that the Ethereum Foundation does not remain stagnant, hinting at what could be considered a redefined mission for one of the industry’s oldest non-profits.

“I believe the role of the Ethereum Foundation also needs to shift … What are things that only the Ethereum Foundation can do?” asked Miyaguchi to the crowd of ethereum developers and enthusiasts.

As the earliest non-profit organization to promote and invest in ethereum, Miyaguchi said that one of the foundation’s greatest strengths was its trusted brand.

She told CoinDesk:

“I believe the Ethereum Foundation has established this trust relationship in the world where we do have the brand. People trust us to be neutral or honest about information so we just want to deliver the true information.”

Miyaguchi aims to lead the organization to focus more heavily this year on improved communications to the general public about the progress and development of the ethereum platform.

“Someone needs to fill in this role,” insisted Miyaguchi. “Who can do this better than others? Not that we’re experts in doing this, it’s more like our position being a non-profit and being neutral [means] we don’t have any business incentives.”

‘Supporting and coordination work’

As such, Miyaguchi concedes the Foundation is no longer the central hub it used to be for ethereum developers, research projects and technology development. Yet, she argues the Ethereum Foundation still has a role to play in communicating to, as well as, coordinating work between different ethereum startups and projects.

“I think that even the supporting and coordination work is still a reason for why the Ethereum Foundation should exist,” affirmed Miyaguchi to CoinDesk.

As Miyaguchi points out, an area of increased coordination she’d like to see this year is with the grants program non-profit administers.

Having recently seen its fifth wave of grantees, seven different projects were awarded an undisclosed amount of funds to address “urgent, important and unique improvements which further the ethereum vision,” as stated in Thursday’s blog post.

But according to Miyaguchi, the grants program for a long-time running hasn’t been strictly organized by Ethereum Foundation members, nor does she envision it as a strictly Ethereum Foundation initiative.

“The grants process is being improved and one of the things I mentioned is we’re involving other community members to assess projects that apply,” explained Miyaguchi. “We have some foundation members, but some members from the community who are part of the grant process.”

Miyaguchi highlighted that the grants program presently was looking at potential partnerships with other startups in the ethereum ecosystem such as venture capital studio Consensys to co-fund the program.

“There’s a lot of [potential for] collaboration since ConsenSys is bigger than us and they have a lot of resources,” said Miyaguchi to CoinDesk.

ConsenSys, which has its own company-specific grants program, announced at ETHDenver the acceptance of new applicants to whom it will seek to give over $500,000.

Though the award amounts given away to Ethereum Foundation grantees this year was not specified, the fourth wave of grantees last October received collectively over $3 million in funding support.

What others are saying

Outside of funding, the Ethereum Foundation was once the focal point for ethereum developers to explore, discuss and ultimately implement blockchain protocol design changes as necessary.

But as highlighted by Hudson Jameson – community relations manager for the organization – its role in regards to decision-making about ethereum protocol changes has taken “a very important step towards further decentralization.”

“They haven’t taken their eye off of the ecosystem … However, they are less involved in direct decision-making of the ecosystem,” said Jameson to CoinDesk.

Jameson highlighted the role the protocol’s creator Vitalik Buterin as proof of this transition, stating “[Vitalik] is definitely still a voice that holds a lot of weight in the ecosystem … [but] his influence has decreased over time by necessity in order to have the community [itself] make more direct decisions.”

Miyaguchi couldn’t agree more. Noting that the very definition of an ethereum “core developer” is naturally changing because “it really is not only Ethereum Foundation people who are building [ethereum,]” Miyaguchi told CoinDesk.

She said:

“Our definition of success is not the success of the Ethereum Foundation. If ultimately the Ethereum Foundation getting smaller is best for the ethereum ecosystem, we are happy with it.”

At the same time, this transition has caused some degree of concern from those within the ethereum community over how exactly decision-making should now progress.

Speaking at an ETHDenver panel about blockchain governance, Jameson, Ethereum Foundation researcher Vlad Zamfir and Ethereum Foundation developer Piper Merriam all agreed the present hybrid form of decision-making about the ethereum protocol was not sustainable.

“I don’t think blockchain governance is like [any] open-source governance we’ve seen before … Is the structure that [ethereum] already has sustainable? I think the answer is no,” said Zamfir during the panel.

Remaining optimistic about the present “opaque” form of governance on ethereum, Merriam added that he is “confident in that group of [core developers] to contribute at least for a while to make reasonable decisions [about the blockchain protocol.]”

On this front, Miyaguchi contends the path forward when it comes to decision-making on an irrefutably global blockchain like ethereum today consists of not just “one, two or three voices” but many.

Miyaguchi concluded:

“Our job is to coordinate but the actual decision-making is not. It can be done by our members. They can be part of it but not all of it.”

Aya Miyaguchi image via Christine Kim for CoinDesk

Ami Ben David is co-founder and managing partner at SPiCE VC, an investor in multiple security token-related companies and co-founder of the Ownera Foundation. 

This article first appeared in ‘Institutional Crypto,’ a weekly CoinDesk newsletter focused on the nexus of Wall Street and crypto assets. The opinions expressed in this article are the author’s own. 

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As one of the very first people to tokenize a VC fund when the term “security tokens” almost didn’t exist, and as an early investor in the space, I have a unique point of view into the rapid growth of this ecosystem.

But growth is not just about numbers, it’s also about growing up.

The pioneers of the security token industry started it with an eye to retail investors – after all, security tokens (STOs) evolved from retail-focused initial coin offerings (ICOs). Fast forward two years, everybody understands a simple fact: It’s all about getting institutional investors to participate.

Security tokens may share some technology with ICOs, but they represent something completely different, the digitization of the way humanity decides who owns what on an immutable shared blockchain ledger. It is a vision that is several orders of magnitude bigger than ICOs ever were, and it is serious business – legal, regulated and grownup.

The supply of quality assets to tokenize largely depends on the availability of institutional investors to pick them up. Now, who is at the heart of the institutional investment ecosystem? Investment banks!

If indeed the goal is to tokenize billions and eventually trillions of dollars’ worth of assets, this industry will not get anywhere near that scale by trying to bypass the investment bankers that are at the heart of the securities market, entities like JP Morgan, Citi, Morgan Stanley, Goldman Sachs, Merrill Lynch and others that institutions already trust with their capital.

Even the name is changing – instead of “security tokens,” industry insiders have already switched to “digital securities,” and to the more appropriate “smart securities” (emphasis on the infusion of code and apps).

The focus is not crowdfunding tokens, it is digitizing the way all ownership of assets is managed.

I personally believe in the long-term viability of bitcoin, but that is irrelevant to the success of the movement to tokenize all securities, which should be tradable for cryptocurrencies, stablecoins, fiat, JPM Coins or any other form of payment invented tomorrow.

When we sold the tokens of our SPiCE VC fund, the majority of investments came in fiat, not bitcoin. It was not a good fit, because it’s too volatile (for now).

To understand why investment bankers will be so pivotal to the next stage of this ecosystem, let’s get down to some details.

There are three trust layers to a scalable smart securities market: information, verification, and distribution. Bankers have a critical role to play in all of them.

Trust Layer 1: Information

In order to invest, investors must know what they are buying. Institutional investors, in particular, are extremely risk-averse; they must know that this new format absolutely guarantees their rights in the assets – that nothing could go “wrong.”

If you look at the current wave of first-generation security tokens, you will see that a few of them provide detailed information and disclosures about token-holder rights, but most are lacking. With some security token,s you practically have to be a detective to know what you’re buying.

We’re not yet feeling the full scale of this fundamental issue, because the market is still in its “primary” stage, i.e. most people buy directly from the issuers and can demand whatever documents they want. Once the secondary markets kick in, people will realize we need a better information model.

I call this information model KYA (Know Your Asset) – documenting the “identity” of an asset in the same way KYC deals with the identity of token owners.

Basically, the KYA for a smart security should simply be a folder of documents, where everything you need to know about your rights as a token holder is clearly laid out. It needs to be complete, updated with disclosures, secure, privacy-enabled and immutable (so nobody can change it unnoticed).

Investment banks can be instrumental in shaping what information is needed for each asset class to bring institutional investors in.

Trust Layer 2: Verification

In blockchain processes, there is a difference between the preparation of the information and the process of verifying and agreeing it represents the truth. Similar processes apply in the current world of securities.

Can a person verify their own KYC/AML? Can they say “trust me, I’m not a money launderer”? No. They can supply a passport, but someone else, a trusted entity, must verify it.

The same applies to KYA – asset information. An ecosystem where every issuer can say whatever they want or change terms down the line without any external verification is an open call for trouble.

This task – verifying the authenticity and value of securities, is something investment bankers, broker-dealers and other underwriters have been doing for decades. This function evolved for a reason – it’s not some intermediary to get rid of.

This verification, the work and the reputation staking, is only useful when done by entities, like investment bankers, that institutional investors fully trust to understand their fiduciary duties and business needs.

Trust Layer 3: Distribution

Once investment bankers and other market players compile and verify the information, and stake their reputation to the assets they promote, they are in the perfect position to market it to their existing client base – including institutional investors and all other significant investor groups.

They are the distributors with the network of trust, they already manage much of the capital flowing into existing securities markets, and as the markets inevitably transition to smart securities, they are the key to the scalability and adoption of this new model.

And this is why the motto “Short the bankers” is so wrong…

Placing the bankers at the center of the ecosystem is the fastest way to grow the industry. Because while many of the big assets may go to the bankers, trillions more will go to new market entrants. In parallel, new infrastructure and technology solutions will be required across all levels of the value chain, from the blockchain itself to the last mile of investor management – this is where the next Amazons and Googles of the blockchain age will emerge from.

When we started tokenizing our fund, there were maybe 5 companies in the security token space. Today, a year and a half later, there are hundreds. It’s a tectonic digital paradigm shift, and bankers should, and will be at its center!

Piggy bank image via Shutterstock