Singapore, SINGAPORE – Usually, investors need information to make decisions about the holding of tokens in a blockchain project as they expect a return from the investment relative to the risks involved. Most will not assume greater risk unless compensated by a higher return. And then there’s greed in all its permutations. The quantum of return is related to the ability of the project to adhere to their roadmap. Many have no cash-generating ability to speak of yet even if managing of working capital is done well.
Bull run triggered by STOs as the next big thing? Regulation and privacy push-pull tug of war. Security tokens by nature need to be registered or be given an exemption by regulators. Proof of work is notoriously wasteful as a consensus mechanism. There are many security tokens masquerading as utility tokens to circumvent legislation.
It has many of the elements and characteristics of equity securities and the time value of money in its pricing and valuation cannot be pre-determined within a wider context. Relationships between a token price and company performance are almost like a torn dollar bill given the framework. These are far from equity hybrids and decision making is where most flounder due to imperfect knowledge.
KPMG’s “Institutionalization of Cryptoassets” suggests that “cryptoassets have potential. But for them to realize this potential, institutionalization is needed. Institutionalization is the at-scale participation in the crypto market of banks, broker-dealers, exchanges, payment providers, fintechs, and other entities in the global financial services ecosystem. We believe this is a necessary next step for crypto to create trust and scale”. In summary, they want in and institutionalization allows the big boys to get a seat at the table and devour everyone’s main course and dessert in the name of compliance.
They are not going to miss the boat on this one by highlighting at the get-go that “crypto assets are a big deal” followed by snazzy illustrations to indoctrinate internal cynics from the that the humble beginnings of Bitcoin have now paved the way for security tokens such as tZero to obtain a letter of intent for sale of US$160M worth of tZero security tokens.
The treatment of accounting information for financial reporting purposes, for the purpose of comparability, is murky at best. As are factors such as industry position, business life-cycle and strategic outlook, necessary for relevant and reliable assessment of performance are limited in this instance to make an informed investment decision. Yes, it was also highlighted that crypto isn’t a solution looking for a problem, going so far as to acknowledge that ICOs “represent an important innovation, providing new pathways and more efficient flows for capital from a significantly wider group of investors”.
Yet many post ICO are selling the ETH and BTC raised to meet obligations as they fall due and this hampers the projects as business entities to survive turbulence in the markets. The ability to ask questions also becomes guestimates at best in the context of specific scenarios. Linda Pawczuk, leader of Deloitte Consulting’s financial services industry blockchain group disparaged ICOs as “the donor market” where investors are not going to get their money back. And she doesn’t like explaining bad behaviour by bad seeds distracting from the big picture of what’s being accomplished for the greater good.
Tokenization is also treated as the buzzword in the KPMG report for the “creation of natively digital tokenized representations of traditional (and emerging) assets that are issued, traded, and managed on a blockchain can reduce friction and overhead costs associated with the issuance, transfer, and management of traditional assets such as securities, commodities, and real estate assets. Cryptoassets that are tokenized versions of traditional assets could also fit well within existing regulatory frameworks, which may mitigate some regulatory uncertainty surrounding newer cryptoassets. Tokenization of traditional assets could also help increase liquidity, codify rules and regulations, and increase transparency throughout the asset lifecycle”.
But the crux remains that there no annual reports for most projects because of it’s “decentralised” nature, “privacy”, and the basic fact that most companies in the scene are barely a year old. There’s no historical financial position and past performance hence various insights on the success of the company cannot be gleaned even to have a subset of information for decision-making purposes. Irregularities and frauds are commonplace, and, in many instances, there are not internally produced management accounts on financial condition to ensure continued viability with sustained earnings and growth during the pioneering stage of its life cycle. Plus, there usually aren’t effective control mechanisms in place by management. Most don’t have the ability to survive change.
The last two words of the KPMG report are as predicted: stay tuned.