Digital assets and cryptocurrencies have seen an explosion in growth due to the extraordinary capabilities of blockchain technology to transform systems for tracking digital transactions. Despite the obvious benefits of digital assets and cryptocurrencies, namely improvements in transaction efficiency, security, and transparency, institutional investors have been slow to take the leap and invest in cryptocurrencies and digital assets. Why?
Regulatory uncertainty is one of the culprits. Pension funds, mutual funds, and endowments are not interested in investing in any assets deemed to be even remotely risky. Many cryptocurrencies are considered to be utility tokens because they have a specific function or use within a specific platform or network. Problematically, many of these so-called utility tokens should actually be registered as securities and achieve compliance with all securities regulations. Some startups launching token sales have sought to avoid jumping through the hoops necessary to meet SEC requirements, but in doing so, these crypto projects have contributed to the negative perception of ICOs as scams.
The tokens that are registered with the SEC and are US-compliant are called security tokens. By following the rulebook and abiding by the standards set by the SEC, security tokens offer institutional investors a comfortability and familiarity that is not easily discovered among utility token offerings.
A CNBC story notes that “[money] managers for pension plans and endowments have been laying the groundwork to invest in cryptocurrencies” but are sitting on the fence due to perceived “volatility, security issues, and headline risk.”
The need for more avenues for wealth generation could not be more paramount than it is today. Former chairman of the Federal Reserve, Ben Bernanke, along with former Treasury secretaries Timothy Geithner and Henry Paulson, recently published an op-ed in the New York Times hinting that another financial crises may be on the horizon unless certain regulations removed to save the economy in 2008 are reinstated: “Our main concern is that these defenses will erode over time and risk-taking will emerge in corners of the financial system that are less constrained by regulation.”
This statement should serve as a reminder that regulations exist to protect people and institutions from corruption and bad practices. Institutional investors have recognized the need for regulation in the cryptocurrency space and have balked at investing in ICOs given the current ambiguity around their legality. Security tokens address this issue by achieving full compliance with the SEC.
Other forces underlining the importance of generating new avenues for wealth generation are stagnant wages and the threat of automation. Though unemployment remains low in the United States, after adjusting for inflation wages are essentially the same as they were 40 years ago. Furthermore, automation puts nearly 50% of jobs in the global workforce at risk. A study conducted by the McKinsey Global Institute estimates that 800 million jobs could be replaced with machines by 2030. Fortunately, the SEC seems to understand the need for opening doors to more investment opportunities. In a recent interview with the Wall Street Journal, Jay Clayton, the SEC chairman alluded to enacting changes that will make it easier for individuals to invest in private companies and startups.
Security tokens combine the best elements of blockchain with the safeguards of SEC adherence to offer individuals and institutional financial players with assurance that their investments will be protected. Beyond the enactment of regulatory changes that improve access to investment opportunities while retaining important protective measures, we need to foster the development of platforms to enable secure trading and easy-to-use portfolio management. The future of digital assets and, potentially the economy as a whole, depends on the successful deployment of such platforms; without them, people will lack the points-of-entry and education necessary to participate.