Texture’s Digital Securities Predictions 2023
In case you missed it we released our review of our 2022 Digital Securities predictions last week – you can read the blog here. As macro events and a crypto meltdown dominated the narrative, we missed on a couple of predictions and were early on a couple of others. But let’s not dwell on the past; it’s time to look to the future now. While the economic crisis is not over, we are, hopefully, through the worst of it. Inflation seems to be edging down slowly and both public and private markets have reset. So how will the nascent digital securities market fare against this backdrop in 2023? Here are our predictions:
1. Regulatory clarity emerges but not how you think
The crypto space has been demanding ‘regulatory clarity’ for several years now, which is often code for more favorable regulations. As a result of industry lobbying efforts, the Digital Commodities Consumer Protection Act (DCCPA) would have given the CFTC regulatory authority for much of the crypto market. But in light of the FTX collapse (SBF was a vocal supporter of the DCCPA), it is likely that Congress will take a step back and re-evaluate the best approach to crypto regulation and will not pass any meaningful legislation in 2023. Meanwhile, the SEC under Gary Gensler will continue to assert its regulatory authority over any activities it deems to involve securities[1]. This is the regulatory clarity that will emerge: an emboldened SEC wielding the four prongs of the Howey Test.
2. Retail investors give up on crypto moonshots, in favor of tokens representing tangible investment opportunities
With many nursing losses from their speculation in tokens such as $SHIB and $LUNA or other crypto rug-pulls, retail investors will turn to security tokens offered through regulated broker dealers. Look out for the growth of fractionalized marketplaces where investors can buy and sell shares of tokenized assets such as real estate[2], music royalties and racehorses.
3. Private Equity expands onto the blockchain
Private equity is a large, fairly opaque and highly institutionalized asset class, and firms like KKR, Apollo[3] and Blackstone[4] have been exploring how to leverage tokenization to improve transparency and reach a wider audience of investors. In addition, with many investors reportedly seeking more flexible liquidity opportunities, offering a tokenized fund structure with secondary trading availability could be a real differentiator for certain PE funds[5].
4. VCs will keep their powder dry, leading private companies to seek alternative sources of funding
Although venture funding dropped by 50% in Q3[6], many startups are pinning their hopes on the reported $290bn[7] of dry powder being deployed in 2023. The reality is that venture capitalists are more focused on shoring up their existing portfolio and are quite happy to stay on the sidelines for the next two or three quarters. Not all private companies can wait that long and will turn to alternative sources of funding such as corporate strategic investors, and crowdfunding through digital securities offerings. Early stage companies can raise up to $5mm via Reg CF, and later stage companies could seek up to $75mm through Reg A.
5. On-chain KYC and AML will become a focus for DeFi players
One of the bright spots in the 2022 crypto collapse is that the pure DeFi protocols functioned as they were supposed to and remained well capitalized. It was the centralized crypto lending entities (CeFi) such as BlockFi, 3AC, Celsius that failed. This validates one of the original tenets of crypto – trustless transactions without the need to a centralized intermediary. As DeFi continues to grow whether through attracting institutional capital or accepting tokenized securities as collateral, the ability to incorporate ‘verifiable credentials’[8]. An on-chain Verifiable Credential can confirm that an investor in DeFi has been through KYC and AML checks and also if they are an accredited investor.
https://www.texture.capital/risks
[1] https://www.coindesk.com/policy/2022/12/07/gensler-says-us-sec-is-fine-going-after-crypto-with-its-current-authorities/
[2] https://www.yahoo.com/now/quantmre-partners-texture-capital-launches-163000367.html
[3] https://www.coindesk.com/business/2022/04/28/apollo-hires-jpmorgans-christine-moy-to-lead-digital-assets-strategy/
[4] https://www.coindesk.com/business/2022/08/17/former-coinbase-vp-adam-white-joins-blackstone-as-crypto-investment-advisor/
[5] Blockchain is a new technology and unproven in financial markets. There is no guarantee that tokenization will enable any secondary market liquidity in the future and your investment may remain illiquid.
[6] https://hbr.org/2022/10/startups-dont-pin-your-hopes-on-vc-dry-powder
[7] https://www.theinformation.com/articles/venture-firms-290-billion-dry-powder-is-about-to-revive-startup-funding