Digital Asset Securities Predictions 2022

2021 has been a great, foundational year for digital asset securities, and represents Texture Capital’s first full year of operations. We are super-excited about what 2022 will bring in the space and have come up with a few predictions. (The below commentary is for entertainment purposes only and should not be considered investment advice.)

1.    A major US financial institution will issue a $100mm+ digital security.

In April 2020 the European Investment Bank made waves by issuing a EUR 100mm bond on the Ethereum blockchain. Leading banks including Société Générale, Santander and the European arm of Goldman Sachs brokered the deal. Uptake among large US institutions has thus far been slower due to a lack of regulatory clarity, but digital security broker dealers like Texture Capital are now well positioned to handle these types of offerings.

2.    Digital Securities issuers can't wait for ETH 2.0 and will shift to Proof of Stake chains with lower fees.

Issuing a digital security smart contract can involve multiple blockchain transactions. With the high gas fees on Ethereum this could be $500 per investor – i.e. $1,000,000 for a issuance involving 2,000 shareholders. Many issuers are already switching to chains like Algorand and Tezos which offer lower fees, but Solana, Avalanche and Polygon have developed strong networks and have an opportunity to capitalize on this for digital securities issuance.

3.    The SEC will announce that it considers some NFTs to be securities.

SEC Chairman has been outspoken that he considers much digital asset issuance and trading to be unregulated securities activities (including even Ethereum). It is only a matter of time before the agency classifies certain types of NFTs as securities. Fractionalized NFTs or those NFTs with tradeable royalty streams will likely come under criticism.

4.    Digital Asset Securities will be launched representing DeFi products, such as crypto lending or yield farming.

Coinbase was in the headlines in September, after the SEC warned them not to launch a product called Coinbase Lend – which would provide a yield to customers who lent certain crypto assets via the Coinbase platform. Putting legal arguments aside, we expect crypto companies to seek to offer these types of DeFi products as digital asset securities as they seek to stay on the right side of the SEC

5.    Security tokens will drive investment in the Metaverse and within the Metaverse. 

The term “Metaverse” jumped into the public lexicon following Facebook’s announcement that it was re-branding and changing their name to “Meta”.

Source: Google

But Facebook isn’t the only company focused on creating and monetizing the virtual reality. Other tech companies are building on their vision for the Metaverse and, with an affinity for blockchain technology, many will seek financing via digital asset securities. At the same time, real estate and other assets within the Metaverse, may qualify as an investment contract under the Howey test and will be offered as digital asset securities.

6.    A regulated DAO will launch as a digital asset security.  

In 2017 the SEC released the DAO Report concluding that “The DAO” tokens were digital asset securities. This did not impede their popularity, however, as many DAOs have continued to launch often structured to fall outside US securities regulations or sold only to non-US investors. In August, Wyoming passed a law formally recognizes DAOs and gives them the same legal power as limited liability companies.

We expect this to trigger further efforts to launch ‘regulated DAOs’, which will be issued as digital asset securities.

7.    Stablecoins will not be classified as digital asset securities

Earlier this year SEC Chair Gary Gensler stated before Congress that stablecoins “may well be securities”. However we feel it is more likely that guidance will come out moving stablecoins towards oversight of banking regulators and not the SEC.

8.    Tokenized Real Estate will take off in 2022, with over $1bn in real estate assets recorded on blockchain.

Real estate, a massive asset class that is illiquid and largely privately held is well suited to tokenization. Every indication suggests that tokenized real estate, particularly commercial real estate, is set to boom in 2022. $1bn in tokenization may well end up being an under-estimate.

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