Why Cryptocurrencies Are In Danger Of Becoming Nothing More Than a Petri Dish of Open Source R&D and Ideas… Tim Lea Follow Oct 30, 2018 · 8 min read

2017 was an exceptional year for Bitcoin and the cryptocurrency markets. It was the year that a new millennial elixir truly came to life. The rising tide of cryptocurrencies seemed to be unstoppable, floating all boats in its path. The flipping of the latest hi-octane Initial Coin Offering (ubiquitously called the “ICO”) became the de facto secondary income stream for the crypto-intelligentsia — those who took the painstaking time and trouble to research and understand the complexities of cryptocurrencies. Millennial influencers so often driven by selfie-induced narcissism touted the latest ICO to their baying throngs. The process was simple:

- buy-in to the cryptocurrency coin with latest heavily promoted ICO at the pre-sale stage;

- wait for the ICO to list on the cryptocurrency exchanges,

- sell the coins for a 2x, 3x 10x return.

- Rinse and repeat

The allure of easy money and dopamine hits sucked millennials into the slipstream of aspirational ambition. It was the digital, decentralized passport to the easy way out. Working for a living was “sooooo 20th Century”. All too often, however, this landscape veiled itself in mixed messages, all so often layered behind the thin veneer of changing the world — one Lambo at a time.

The Lamborghini raging bull logo became the symbol of the aspirational cryptocurrency bull markets, with the supercar global sales hitting their all-time peak in 2017. But just like the Spanish fighting bulls upon which the logo is based, fighting bulls do not survive the meticulous, clinical precision of their matadores. Their cold, hard, steel delivers the final coup de grace. The regulators began to deliver theirs.

Behind the shade of the largest eight ball meteor to hit them since the dot-com era, global regulators were caught off-guard. Their high-wire act of precariously balancing innovation and governance became too much to handle. With sheer desperation, they tried to tame a raging bull that was simply out of control. Global regulators adopted a unified mantra one after the other :

“Say No! …then negotiate”

Progressively, jurisdictions began to squeeze the regulatory vice on the cryptocurrency markets and especially ICO’s. Regulatory arbitrage was everywhere as ICO’s desperately tried to switch jurisdictions to find their ever-decreasing, friendly faces. The markets were constantly winded with the ever-repeating regulatory sucker punches, sending cryptocurrencies crashing and millennials running for the nearest exits, their faces etched with fear as they faced the reality of a diminishing game of musical chairs as buyers for their failing investments became increasingly elusive.

The Cryptocurrency markets tumbled nearly 80% from their all-time dizzy heights in December 2017. What followed can only be described as a protracted hangover as the burgeoning bull market turned to a brawling bear.

Lambos turned to losses, Coin Offerings turned to compliance, FOMO to fear. The sweet talk of ICO projects turned to sobering, sour, talk of securities and compliance. The Hollywood smiles of Class action lawyers began to widen as they prepared for precipitative action by regulators. There was a cold, hard realization that the existing law was the bedrock of crypto-realism rather than the libertarian promise of freedom from governmental interference and censorship. Seasoned cryptocurrency owners had knowing smiles; fresh-faced millennials had grimaces, every pore, pummelled into submission with disillusionment.

The seven stages of grief compressed like an out of tune accordion; FOMO turned to MOFO as desperation clung to the hope of blaming someone else; greed turned to remorse to anger, pain, depression and finally a sense of resigned hope that things would improve… eventually. Over time, the HODLR was etched in stone — the millennial malapropism for those that hold cryptocurrency for the long-term, rather than sell them at a loss. Perhaps millennials were always destined to be HODLERS, driven by the cynical financial puppeteers who had played out their well-worn cyclical boom and bust playbooks with eloquent precision. This sense of realism spilled into the corporate zeitgeist.

With falling cryptocurrency prices, questions were asked about the viability of so many publicly-funded projects. Return on Investment became the all-to-familiar corporate ringtone. With increased vigor, the underlying blockchain technology became critically assessed in its own right as it continued its commercial journey. Slowly, and with increased purpose, the blockchain began to de-couple itself from cryptocurrencies with the ever-increasing realization that:

“Cryptocurrencies need blockchain but blockchain doesn’t need cryptocurrencies.”

Whilst recognizing the power of the underlying technology, Corporates also recognize the absolute need to mitigate risk. Risk minimization is in their DNA and in the expectations of their shareholders. Decentralization, the mainstay of so many cryptocurrency-based projects, holds little interest to corporates. They need an infrastructure of trusted partners they know — not the decentralized structures of partners they do not. Private blockchains are their links to the controls they need, like the “intranets” developed in the internet boom. The narrative, however, is more demanding.

The expectation of Blockchain Technology is for vast, improved performance. Corporate headaches need fast, efficient painkillers — not the sweet promise of voluptuous vitamins that could improve corporate life in the dim and distant vision of a decentralized future. Whilst the nirvana of enabling the automation of Corporate performance, governance, and compliance through transparent computer code alone is the libertarian dream, it is a shareholder’s nightmare. The freedom fighters have increasingly had their wings clipped by not only by the litmus test of unacceptable risk but also by a realization that the technology just isn’t ready.

The Blockchain for corporates continues to be based on the premise of power and potential. The reality is that the promise of this premise has struggled to deliver tangible results. Instead, corporates have to feel satisfied with technical roadmaps that are built around the four P’s:

- The Proof of Concepts

- The Prototypes

- The Pilots

- And … the Puffing up of chests

Everyone wants the 5th “P” — Production-ready Products — and yesterday; but the technology remains very young and untested in production environments. This beggars so many questions:

- Where is the technology heading?

- When will the technology show its first true killer application?

- When will we see production-ready products solving actual problems?

- Where will the opportunities lie for the future?

Each of these is a very expansive question in its own right, but, in truth, no-one really knows exactly how and, more importantly, when the technology will be ready to truly enable performance, the corporate way. Scalability, security and privacy are the absolute foundational bedrocks necessary for the technology to succeed and while there are constant improvements being seen, these remain challenged currently.

Undoubtedly we will see a tipping point when production-ready products will be released and the ever-elusive “killer app” will be born — but this is still some way off. In the interim, most cryptocurrencies in their current format, are in severe danger of losing their allure and relevance. They are in severe danger of being ignored by major corporates and, as a result, are in severe danger of being marginalised. Survival is Darwinian.

Survival is not always about being the fittest; it is about being the most adaptable to new and evolving environments. For the cryptocurrency markets this about embracing Institutions and the landscapes they expect. Unfortunately, within the cryptocurrency bubble, too many, all-to-familiar, high-profile voices allude to their almost god-given right to ownership of the technology, with the fervent belief that Institutions will come to them for the access code to their promised land. Those with the funds and distribution that have the capability to take the technology to the mainstream view things differently, and through their own financial lens; the lens that gives them the return on investment they need through solving problems they need fixing, all within a structure of mitigated risk that includes at its very core, and in its very essence, regulation and compliance.

Regulation and compliance are, however, an anathema to the hardcore cryptocurrency community. In the purists’ eyes Regulation and Compliance are contrary to everything the founding father, Satoshi Nakamoto, detailed in his original whitepaper. After all, the technology was designed to enable digital cash to be transferred from one person to another without going through a financial institution. The reality, however, is about adapting and surviving, and there are further forces at play that make this narrative even stronger — security tokens.

Security tokens are set to form the next major structural wave in the development of the global blockchain ecosystem. Whilst based around blockchain and cryptocurrency-based technologies, they have one crucial and vital difference that completely defines their underlying value proposition. They actively embrace regulation and compliance.

As we will explore in the next blog, security tokens will enable Institutions to broadly embrace the cryptocurrency markets, previously unavailable to them. The majority of investment mandates that determine the allocation of capital for large institutions require that they invest in regulated structures — for example bonds and equities — rather than unregulated structures such as decentralised cryptocurrencies. Regulators are already showing signs of warming to security tokens, because they can rely upon many of the existing legal structures and protocols to deal with them. This warmth has the potential to provide a wide regulatory bridge for Institutions, and therefore large swathes of capital, to embrace the underlying technologies more fully and to take advantage of the major new financial opportunities, markets and products that this regulatory gateway has the potential to provide.

Those cryptocurrencies that remain focused on decentralised and unregulated structures and do not adapt to the new regulatory and compliance landscape are in serious danger of becoming nothing more than a petri dish of open source R&D and ideas that will tend to gestate within their own echo-chamber.

Addendum

In my upcoming podcast series, “Down the Rabbit Hole: the Blockchain and beyond” we will be addressing the realities of the blockchain, as it continues to evolve as it decouples from cryptocurrencies and how the future is beginning to develop with security tokens. Launching on 15th November “Down the Rabbit Hole: the Blockchain and beyond” will give you first-hand insights into the technology, its adoption by providing analysis, tips and interviews with stakeholders from within the blockchain ecosystem and beyond to help you assess the potential future scenarios, deal with the challenges and welcome the new sets of dynamic opportunities.

About the Author

Tim Lea is an Australian-based Blockchain Entrepreneur & Evangelist, an International Keynote Speaker and Author of Blockchain Book Down The Rabbit Hole, all written in plain English. He also runs executive briefings and 1/2 day, 1 day and two day masterclasses, workshops and executive briefings.