- Crypto and Blockchain investments are skyrocketing despite SEC’s strict ICO rules
- SEC’s guidance has helped venture capitals to know where to better invest their funds
- Venture capitals prefer investing in utility tokens that can solve real-world problems
Despite the regulatory pressure and issues in initial coin offerings (ICOs), venture capital investments for blockchain startups continue to grow. In fact, this year, it has skyrocketed to over $4 billion.
Bleeding market caps
According to research, more than 2,000 significant investors are placing their funds into crypto and blockchain companies. However, over 75% of these ICOs’ worth is less than their initial capitalizations. While the money for blockchain startups is still there, the finances are obviously undergoing traditional structuring.
There are also some US-based venture capitalists who are becoming wary of regulators. It has led them to resort to deals that will work even without crypto speculation from the crowd of retail investors. These deals are using asset-backed coins and security tokens and not utility tokens.
VCs prefer startups with real-world products
A lot of the VC industry’s blockchain players are now exclusively working with startups that offer real-world services and products. They focus on solutions that are based on crypto and blockchain technologies and not on random companies that associate their business to cryptocurrency just by adding “coin” to their brand names.
While there a lot of ICOs these days, many of them have been very speculative. These ICOs are selling tokens via crowdfunding with the intention to raise money and business development.
Utility Tokens vs Security Tokens
Thanks to the guidance given by SEC, venture capitals now know that it’s better to invest in utility tokens that are not backed by assets. While the SEC is starting to regulate the marketplace of cryptocurrency, these utility tokens are still valuable for specific purposes and for various communities. They are now a permanent part of the financial ecosystem since they can help resolve certain real-world problems.
The problem is that these utility tokens do not pass the Supreme Court’s Howey test. As a result, they are not considered securities when it comes to regulatory purposes. They only represent a certain type of future access to the products and services of the startup and not an asset that could eventually be liquidated. Moreover, utility tokens do not give its holders the ability to control decision-making. Instead, they can only enable them to interact with the organization’s services. Therefore, with a well-planned utility token, it will not be regulated as a security. Moreover, since it works in an environment of its own, it cannot compete with big names such as Ethereum or Bitcoin.
As for the security tokens, they derive their values from tradable external assets that have an ownership interest. They also meet the Howey test so they are considered true investments since the investor can get profit from the efforts of third-parties in the same enterprise.
These tokens have a lot of use such as profit sharing, paying dividends and interests, accounting for transactions, and other blockchain-enabled functions as well. Regulators now classify asset-backed tokens as securities, thus, venture capitalists have started considering them different from other utility tokens without the assets behind them.
The Changes in Blockchain Venture Capital
After the roller coaster events in the ICO cycle, venture capitals started using some of the proceeds of their token sales to support the development of open-protocol. VCs can benefit indirectly by making new revenue streams, or directly once the token’s marketplace or trading value appreciates. There are just some of the possible outcomes that could happen, and each of these possibilities will bring VCs different opportunities and risks. Traditional venture capitalists such as Andreessen Horowitz, Sequoia, Union Square Ventures, Bain, MetaStable Capital, and more are leading the way to a new wave of blockchain investment.