Texture Capital 2022 Year in Review

We entered 2022 with many observers recognizing that storm clouds were on the horizon but optimistic that markets and the economy would be able to navigate the challenges ahead. However, Russia’s invasion of Ukraine exacerbated supply chain challenges driving up the price of oil and inflation leading the Federal Reserve to increase interest rates from 0.125% to 4.375% over the course of the year. The end of cheap money led to a rapid repricing of risk assets with the S&P500 dropping by ~20%[1], and the Bloomberg Galaxy crypto index down over 70%[2]. On top of this the outgoing tide of cheap money exposed significant financial fraud within crypto markets culminating with the recent downfall of FTX.

The impact of these events has been strongly felt within the technology space and in particular digital assets. Valuations have dropped and venture capital funding has also dried up. With market confidence in the digital asset space severely dented, participants are wondering about the future direction of the space. One outcome will be increased regulation which should be a positive for digital asset securities strategies where token issuance and trading occurs in full compliance with securities regulations. Texture will shortly be releasing our predictions for the digital asset security space in 2023, but first here is a lookback on last year’s predictions and a grading of our performance.

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

Half-correct. This prediction stemmed from the 2021 European Investment Bank issuance of a 100mm EUR bond on the public Ethereum blockchain. While we did not see a similar type of transaction in the US, there was another similar 100mm EUR issuance by the EIB, and Wisdom Tree recently announced they would be launching nine digital funds.

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

Correct. The Ethereum merge finally went through in September and has been a great success with transaction validation now being performed by Proof-of-Stake and gas fees up to 93% lower. In the meantime however, digital asset securities issuers had begun issuing on other PoS smart contract chains. The Avalanche blockchain has been one of the key beneficiaries and is now supporting KKRs tokenized healthcare fund and the JPM Onyx group leveraged layer II blockchain Polygon for their groundbreaking DeFi government bond trade.

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

Correct. In March of this year, Bloomberg reported that the SEC’s enforcement division had issued a number of subpoenas regarding fractionalized NFT offerings. Fractionalized NFTs can meet many prongs of the Howey Test, importantly the Xth prong that looks at whether the investment is based on the efforts of others. When buying  a fractionalized NFT, the investor is relying on another party to source the NFT and fractionalize it. Note that an analog comparison would be Masterworks, who offer shares in Series LLCs via a Regulation A offering representing ownership in art by artists such as Banksy and Basquiat.

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

Half-Correct. Following the SEC blocking of the Coinbase Lend product in September 2021, we expected crypto-lending products to be offered as securities going forward. Sure enough in February BlockFi announced that they would be filing an S-1 for a $100mm registered offering. However, as we know, the crypto-lending market imploded over the summer due to excessive leverage and risk taking. BlockFi ultimately filed for bankruptcy, along with many other crypto lenders and the future of crypto lending products in the US is now highly uncertain.

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

Incorrect. Metaverse was one of the top buzzwords in 2022 Interest has dropped off significantly since then with Google Trends reporting internet searches for the word are down 75%. $MANA, the native token of one of the leading metaverse, Decentraland, is down over 90%, and an analysis from DappRadar suggests there are fewer than 1,000 daily active users in the metaverse. We got this one dead wrong (or just too early?); there was nothing going on in the metaverse in 2022 and probably not much in 2023 either.

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

Incorrect. 2022 saw a significant level on interest in DAOs. There are now over 700 DAOs registered in Wyoming since the state passed a law in 2021 providing liability protection for DAO members who organize as a Wyoming limited liability company. While Texture has not been able to fully analyze all 700+ DAOs, in does not seem that any have issued security tokens yet. One of the most well know, American Crypto Fed DAO did attempt to register it’s tokens with the SEC but the S1 was rejected.

7.    Stablecoins will not be classified as digital asset securities

Correct. Following the announcement of Facebook’s (a.k.a. Meta) stablecoin Libra (a.k.a. Diem), the Managed Stablecoins are Securities Bill gained some traction in congress. Since then all proposed legislation and guidance including the Stablecoin Innovation and Protection Act of 2022 and OCC guidance provide oversight to banking regulators.

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

Incorrect. The outlook for tokenized real estate continues to build, but Security Token Market is currently tracking the value of tokenized real estate at only $60mm. It looks like we will have to wait another year for tokenized real estate to reach the sky. There are some exciting projects to watch including AKRU who has developed a tokenized marketplace for commercial real estate investing and QuantmRE who is leveraging blockchain to fractionalize the $29 trillion market for homeowner equity.

https://www.texture.capital/risks

[1] https://markets.businessinsider.com/news/stocks/stock-market-news-today-sp500-ends-year-down-20-percent-2022-12

[2] https://www.bloomberg.com/quote/BGCI:IND