Goodbye ICOs, Hello TAOs? (CoinDesk)

Goodbye ICOs, Hello TAOs? How Tokens Will Change in 2018.

(Christopher Pallotta and Vincent Molinari are the co-founders of Templum, an alternative trading system designed for cryptographic assets.)

As we enter 2018, it appears that blockchain’s contribution to capital formation has only begun.

An unfortunate influx of both naive and bad actors begs for regulatory scrutiny, obscuring the intentions of ethical market participants anxious to operate within an informed set of dynamic guidelines and eventual laws.

In this environment, many anticipate increased regulatory action and enforcement by the SEC against issuers in 2018, and we will. But I don’t expect the actions to stop there.

We will also likely see enforcement actions against certain “exchanges,” which transacted in coins that are definitely securities. We will likely see FINRA jumping in with the SEC bringing actions against individuals who acted as placement agents and finders in taking compensation for ICO sales. Unlicensed investment banks or unauthorized entities will be regulatory targets, having conducted securities business for their ICO activities.

Of major importance for everyone involved during this time will be the need for quality education, alleviating confusion surrounding how blockchain’s facilitation of financial transactions differs from cryptocurrencies.

As a capital formation tool, blockchain is likely to increase the reach of both small- and large-scale fundings, adding a tangible new layer of transparency for issuers and regulators alike, while confirming KYC (know your customer) suitability compliance and providing investor protection, straight through processing.

We will see increased collaboration between the blockchain or crypto community and currently regulated entities, as a movement toward asset quality and rigorous due diligence begins to dominate the marketplace.

The result will be increased activity and investment by institutional investors and venture capitalists.

The Name Change

As for what that transition will look like in practice, those who are familiar with current practices in the token economy should expect cosmetic changes.

The entry of new market participants will greatly expand pools of capital, but the vast majority of ICOs will embrace issuance as securities, given the clear guidance from the SEC. In response, there will be very few “true” utility token issuances in 2018. The SAFT framework will rapidly decline as an issuing structure.

In response, I expect that a new second-generation acronym (such as tokenized asset offering or “TAO”) will replace ICO. Increasing bad press, regulatory enforcement and class action lawsuits (concerning coins issued before the infamous DAO) may dominate headlines, and ultimately, tarnish the monicker.

But this new model won’t just be the same idea with a new coat of paint. Expect the SEC, CFTC and FINRA to collaborate on industry guidelines that merge the priorities of each, very similarly to how the SEC and NASSA cooperated for Reg A+ during the JOBS Act.

A regulatory oversight consortium would propose multi-agency rules for tokens, addressing their dual role in capital raising and eventual transactions as a secondary instrument.

This could create a pathway for perhaps an integrated hybrid token, one which is not only a security but also maintains a derivative utility function and or an alternate currency status, which may settle the utility vs. security vs. commodity debate.

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