Outlook 2022 — Part 1: Crypto, Blockchain, Security Tokens
Regulation & Security Tokens
In 2021, the total market capitalisation of cryptocurrencies has increased by over 250%, from US$780 billion at the beginning of the year to over US$2 trillion, and the debate among regulators on how to deal with the rise of crypto has intensified. The need to protect consumers and minimise risk should be ensured while not restricting innovation.
On the regulatory front, global oversight of crypto remains uneven.
While China bans all crypto activities, there are other jurisdictions such as Dubai, Gibraltar and Malta that position themselves as crypto hubs and other countries such as India where the crypto startup ecosystem is growing strongly that struggle to decide between ban and regulation.
The Financial Action Task Force (FATF) published its updated guidance on virtual assets and virtual asset service providers (VASPs) in October 2021 to guide how countries implement their crypto regulation. In particular, this is about implementing the Travel Rule, which requires members to share data on virtual asset transactions over a certain amount.
The guidelines touch on some of the most pressing issues in the crypto industry , including stablecoins , peer-to-peer transactions, non-fungible tokens (NFTs) and decentralised finance (DeFi).
Stablecoins and DeFI projects in particular are squarely on regulators’ radar for 2022.
Gary Gensler, chairman of the Securities and Exchange Commission, and the President’s Working Group on Financial Markets called on Congress to subject stablecoin issuers to the same level of regulatory scrutiny and legal obligations as banks.
There are also calls for broader regulation of digital assets from the highest levels of economic policymakers, including the IMF. The IMF’s demands relate to cryptocurrency service providers offering services such as transfer, storage, settlement and custody of digital assets, must be licensed or authorised, requirements should be tailored to the specific use cases of cryptos, and governments and authorities should require that regulated financial institutions provide comprehensive representations of their crypto exposure and exposures.
A lot is expected to happen in 2022 in terms of regulation, but there will remain uncertainty about the regulatory environment compared to other countries.
The last Security Token Offering (STO) approved by BaFin in Germany at the end of 2021 comes from Luxembourg-based game developer Exordium, which wants to raise €8 million for its game Infinite Fleet. The STO on the Liquid Network, a sidechain of the Bitcoin blockchain, has approved. BaFin has previously approved STOs on the Ethereum blockchain. Alterra Worldwide kicked off 2022 with one of the world’s leading real estate tokenization projects for a new multifamily tower in downtown San Jose called Tower 27, raising hopes for more to come.
In addition to this STO news, 2022 kicks off with more interesting announcements regarding security token. Leading crypto exchange BitMEX announced a partnership with Tokeny, a leading provider of tokenization services, to support the launch of its BMEX token, which is designed to reward customers for their loyalty and INX Limited (INX), the owner of digital asset trading platforms, announced the acquisition of Tokensoft Transfer Agent LLC (TTA), an SEC-registered transfer agent owned by Tokensoft Inc. to be able to offer a comprehensive solution to public and private companies seeking to raise capital and list digital securities.
JP Morgan also predicts in their latest report that 2022 could be the year of financial tokenization and could further drive institutional adoption.
While many in the crypto community summed up 2021 as the year NFTs experienced massive growth, analysts at JPMorgan predicted that greater interoperability among different blockchains and financial tokenization could be the hallmarks of this year.
JPMorgan Research analysts Kenneth Worthington and Reginald Smith believe the evolution of crypto markets will accelerate this year, particularly for financial services, as greater capacity and transaction speeds are achieved through upgrades to the Ethereum blockchain or new Layer 2 initiatives, and the tokenization segment is still in its early stages, bringing significant potential to the financial services space. “In our future, we see tokenization (and fractionalization) of loans, equities, portions of real estate, and non-traded assets including private equity,” they state.
So, if 2020 was the year of DeFi, 2021 the year of NFTs, 2022 could be the year of security tokens and STOs.