Castle Island Ventures Partner's "Eight Predictions" for 2020

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Divergence of major trading platforms

Over the past few months, Binance, Bitfinex, and Poloniex have stopped trading services for US users. After the lawsuit, BitMEX may take stricter measures against US users.

As exchanges serving U.S. users try to avoid scrutiny from the daunting “Big Four” — the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Financial Crimes Enforcement Network (FinCEN) and The New York Attorney General's Office (NYAG), which means the honeymoon period is over and things are going to get more difficult.

Not just Yanks. The UK has just appointed digital currency skeptic Andrew Bailey as governor of the Bank of England. Over the past year, the U.K.’s Financial Conduct Authority (FCA) has expressed displeasure with its own commitment to innovation and appears to be displeased with domestic crypto offerings. In the European Union, Jan. 10 will mark the start of the tough fifth anti-money laundering directive.

These events have put European digital currency exchanges under heavy pressure. Coupled with the increasingly stringent attitude of the SEC, by the end of 2020, the world's two major capital markets may effectively ban the long-tail theory of encrypted assets. Although the crypto space is a global market, capital is unevenly distributed. The exodus of users from these platforms in the US and EU will put pressure on the liquidity of tokens that trade exclusively on less regulated exchanges. South Korea and Japan alone are not enough to keep them afloat.

Copycat exchanges will move across jurisdictions and hope to avoid long-term fallout from the law. Due to the unstoppable liquidity of BTC and Ethereum, they can still function, they just lack banks and fixed headquarters. This gives them an unprecedented ability to resist stress.

That said, the case of BTC-e is thought-provoking. No matter where you are, the United States always has a way to find your tracks. I don't want to be running any of these bucket shops in 2020.

Stricter scrutiny of enablers

2014-2019 As ICOs become more transparent, censors expand their scrutiny from asset issuers to asset promoters.

From court cases, we see institutions facilitating and profiting from ICOs. Some class action lawsuits will expose funds that benefit from selling ICOs to retail investors.

Many fund companies serve as effective underwriters/issuers of these tokens by purchasing early allocations to sell tokens to the public and exit the public sale position. These actions may violate Section 144 of the Act.

Such actions have generally been ignored so far, but if the SEC begins to expand its scrutiny, the subpoenas could become enforcement actions. Even well-known venture capital funds could be affected. It's no secret that many VC funds encourage failing portfolio companies to raise non-dilutive capital from retail investors to stay afloat.

If regulators expose the scale of these fund companies’ participation in the issuance of illegal tokens, these fund companies will not only suffer reputational damage, let alone bear potential legal consequences.

Issuing legal securities, not pseudo-securities

Some of the most popular assets over the past 18 months have become cash flow derivatives, meaning that the value of tokens depends on cash flow conditions.

MakerDAO’s value derives in part from the “buy-and-burn” function, which gradually shrinks the supply of assets, funding the fees attached to the protocol.

Likewise, Binance provided BNB owners with an informal commitment to use a portion of trading revenue to buy back the asset. Following the success of BNB, many other exchanges have also begun to design their own cash flow tokens.

These exchanges performed fairly well last year amid a sell-off in “commodity” crypto assets and utility tokens, but shareholders are starting to realize that the buyback model is not actually the same as share buybacks. Reducing the liquidity of any token without explicit declaration of company assets does not really constitute a return on investment for token holders. At the same time, Binance unilaterally changed the wording in the white paper to clearly stipulate the obligations to BNB holders. This move also reminds us why corporate governance exists.

Issuers have historically been skeptical about the true cash flow of injected assets. It's out of a sort of utopian desire to avoid securities regulation.

As I wrote in my master's thesis three years ago:

ICO marketing is essentially a game of convincing investors that selling tokens gives them the right to use and profit from the network, while convincing regulators that tokens do not represent securities. This behavior ultimately proved undesirable.

Of course, the days of spotty regulatory action are coming to an end. Most sensible jurisdictions now prohibit the issuance of bogus securities to retail investors. Those still experimenting with token models will bite the bullet and consider issuing fiat securities.

In the United States, this will mean that the SEC will issue more legal regulations. Issuers will recognize that they have a formal obligation to token holders. I expect some creative regulations to be enacted.

I hope that the token will provide investors with concrete guarantees to ensure access to capital stacks and real dividends (rather than tedious "buy-and-burn" models), and perhaps some other obligations.

There is a lot that can be done if issuers understand that what they are creating amounts to a security.

Liquid and sidechain technology go further

As people's demand for "function chain" decreases, people gradually realize that users and service providers will refocus on the practical application of blockchain.

If BTC usage picks up again, exchanges are ready to respond. Many exchanges have aggregated settlement platforms like Liquid, which is more suitable than Lighting for settlement between trust-minimized exchanges.

Traders are likely to realize the advantages of Liquid. Encrypted assets mean that WhaleCall cannot inform all encrypted Twitter of your USDT deposit. Who likes to compete with each other? When BTC fees rose in late 2017, many traders and arbitrageurs used currencies like Litecoin and Ripple as emergency conduits.

By using sidechains like Liquid, traders can no longer transfer assets to circulate funds. As far as I know, not many people are using Liquid at the moment, but if BTC fees rise again, it might become more meaningful. By regularly settling transactions bilaterally with sidechains like Liquid, exchanges can pass the savings on to users.

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This also reflects the mature development of the equity market. Clear lines have emerged between brokers such as River Financial, exchanges such as Bakkt and ErisX, and custodians such as BitGo or Fidelity Digital Assets. It would make more sense for each platform to be responsible for its own business.

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Stablecoin liquidation

Some commentators pointed out that it is very strange that issuers of stablecoins such as USDC can convince regulators.

I'm no statistician, but I believe in cash and transactional privacy and am appalled by this apparent long-term regulatory loophole. Can stablecoin issuers fully understand the edge of the network and ignore the internal network? So far the policy is: don't ask (users), don't tell (regulators).

Gray market issuers like Tether are likely to be beneficiaries of this situation if they survive the fight with the NYAG.

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"Really interesting" blockchain games appear

It is sometimes said that the creators of blockchain games have forgotten the first rule of the game - the game has to be fun. But this is rarely mentioned. Blockchain games are not enjoyable games because they have to fend for themselves.

In 2020, some well-known game studios will launch some games with blockchain elements-maybe a local integrated market, or game items. These elements will be seamlessly integrated into the game. Users may not know that their assets are registered on-chain. There are plenty of professionals who have spent ample time on the subject, so these games can be a lot of fun to experience.

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Summarize

Summarize

Some may think my predictions are too pessimistic. If that's the case, the outlook for many areas of the "crypto industry" is pretty grim indeed. But the overall estimate is pretty good. We've built up so much utopianism and opportunism over the past few years that we're just starting to weed out the industry.